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FORM 10-K

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(MARK ONE)

[X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2002

OR

[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ___________ TO  _____________

Commission file number 0-26944

Silicon Storage Technology, Inc.(Exact name of Registrant as Specified in its Charter)



|California                                                     | 77-0225590                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

1171 Sonora CourtSunnyvale, California     94086(Address of Principal Executive Offices including Zip Code)

(408) 735-9110(Registrant's Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
                          Common Stock, no par value.

Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes
[X]       No  [     ]

1

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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act).  Yes [X]       No  [     ]


Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K.   Yes [X]          No  [     ]Aggregate market value of the voting stock held by non-affiliates of
SST as of June 28, 2002: $617,946,000  based on the closing price of SST's
Common Stock as reported on the Nasdaq National Market. Number of shares
outstanding of SST's Common Stock, no par value, as of the latest practicable
date, February 28, 2003: 94,240,712.Documents incorporated by reference: Exhibits previously filed as noted
on page 41. Part III - A portion of the Registrant's definitive proxy statement
for the Registrant's Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission.2



Silicon Storage Technology, Inc.

                                    Form 10-K

                      For the Year Ended December 31, 2002

                                TABLE OF CONTENTS



|Part I.                                    |                                                                                                | Page
|------------------------------------------ | ---------------------------------------------------------------------------------------------- | ----
|Item 1.                                    | Business                                                                                       | 4   
|Item 2.                                    | Properties                                                                                     | 11  
|Item 3.                                    | Legal Proceedings                                                                              | 11  
|Item 4.                                    | Submission of Matters to a Vote of Security Holders                                            | 12  
|Part II.                                   |                                                                                                |     
|Item 5.                                    | Market for the Registrant's Common Equity and Related Shareholder Matters                      | 13  
|Item 6.                                    | Selected Consolidated Financial Data                                                           | 14  
|Item 7.                                    | Management's Discussion and Analysis of Financial Condition and Results of Operations          | 15  
|Item 7A.                                   | Quantitative and Qualitative Disclosures About Market Risks                                    | 37  
|Item 8.                                    | Consolidated Financial Statements and Supplementary Data                                       | 37  
|Item 9.                                    | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           | 38  
|Part III.                                  |                                                                                                |     
|Item 10.                                   | Directors and Executive Officers of the Registrant                                             | 39  
|Item 11.                                   | Executive Compensation                                                                         | 39  
|Item 12.                                   | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | 39  
|Item 13.                                   | Certain Relationships and Related Transactions                                                 | 39  
|Item 14.                                   | Control and Procedures                                                                         | 39  
|Part IV.                                   |                                                                                                |     
|Item 15.                                   | Exhibits, Financial Statement Schedule and Reports on Form 8-K                                 | 41  
|Index to Exhibits                          | 41                                                                                            
|Signatures                                 | 44                                                                                            
|Certifications                             | 45                                                                                            
|Index to Consolidated Financial Statements | 47                                                                                            

3

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PART I



Item 1. Business

Overview

We are a leading supplier of flash memory semiconductor devices for
the digital consumer, networking, wireless communications and Internet computing
markets.

We offer over 90 products based on our SuperFlash design and manufacturing
process technology. Our customers include: 3Com, Apple, Asustek, BenQ, Cisco,
Dell, First International Computer, or FIC, Gigabyte, Huawei, Hyundai, Infineon,
Intel, IBM, Inventec, Legend, LG Electronics, or LG, Motorola, National
Semiconductor, NEC, Nintendo, Nortel, Panasonic, Philips, Quanta, Samsung,
Sanyo, Seagate, Siemens, Sony, Sony Ericsson, Texas Instruments and VTech.

We also license our SuperFlash technology to leading semiconductor companies
including Analog Devices, Advanced Technology Materials, Inc., or ATMI, IBM,
Motorola, National Semiconductor, NEC, Oki, Samsung, Sanyo, Seiko-Epson, Taiwan
Semiconductor Manufacturing Co., Ltd., or TSMC and Winbond for applications in
semiconductor devices that integrate flash memory with other functions on a
single chip.

Our products are manufactured at leading wafer foundries and semiconductor
manufacturers including Samsung, Sanyo, Seiko-Epson, TSMC and Yasu Semiconductor
Corporation, or Yasu.  We also work with Oki, Samsung, TSMC and Vanguard to
develop new technology for manufacturing our products.

The semiconductor industry has historically been cyclical, characterized by
periodic changes in business conditions caused by product supply and demand
imbalance. When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions. These downturns are characterized by weak product
demand, excessive inventory and accelerated declines of selling prices.  In some
cases, downturns, such as the one we have experienced since late 2000, have
lasted for more than a year. Our business could be further harmed by industry-wide
prolonged downturns in the future.

We derived 88.5% of our net product revenues during 2002 and 80.7% of our net product
revenues during 2001 from product shipments to Asia. Additionally, substantially
all of our wafer suppliers and packaging and testing subcontractors are located
in Asia.

Industry Background

Semiconductor integrated circuits are critical components used in an
increasingly wide variety of applications, such as computers and computer
systems, communications equipment, consumer products and industrial automation
and control systems. As integrated circuit performance has increased and size
and cost have decreased, the use of semiconductors in these applications has
grown significantly. According to a December 2002 Dataquest report, worldwide
semiconductor device revenue was $153 billion in 2002 and is expected to grow to
$251 billion in 2006.

Historically, the demand for semiconductors has been driven by the PC market.
In recent years, growth in demand for semiconductors relating to PCs has been
outpaced by growth in demand for semiconductors that are used in digital
electronic devices for communication and consumer applications.  Communications
applications include digital subscriber line modems, cable modems, wireless
local area network, or LAN, devices, cellular phones and pagers. Consumer-oriented
digital electronic devices include digital cameras, DVD players, MP3
players, personal data assistants, or PDAs, set-top boxes, CD-ROM drives and
Global Positioning System, or GPS, navigation systems. In order to function
correctly, PCs and other digital electronic devices require program code. The
program code defines how devices function and affects how they are configured.
In PCs, this program code, called BIOS, initiates the loading of the PC's
operating system, which is then read from the disk drive. In the case of other
digital electronic devices, the program code is stored in its entirety in
nonvolatile memory, mostly in flash memory. As a result, virtually all digital
electronic systems that use a processor or controller for computing, consumer,
communications, and industrial applications require nonvolatile memory.

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System manufacturers generally prefer nonvolatile memory devices that can be
reprogrammed efficiently in the system in order to achieve several important
advantages. With re-programmable memory, manufacturers can cost effectively
change program codes in response to faster product cycles and changing market
specifications. This in turn greatly simplifies inventory management and
manufacturing processes. Re-programmable memory also allows the manufacturer to
reconfigure or update a system either locally or through a network connection.
In addition, in-system re-programmable devices can be used for data storage
functions, such as storage of phone numbers for speed dialing in a cellular
phone.

Flash memory is the predominant re-programmable nonvolatile memory device
used to store program code. Flash memory can electrically erase select blocks of
data on the device much faster and more simply than with alternative solutions,
such as Erasable Programmable Read-Only Memory, or EPROM. Moreover, flash memory
is significantly less expensive than other re-programmable solutions, such as
Electrically Erasable Programmable Read-Only Memory, or EEPROMs. As a result,
the demand for flash memory has grown dramatically. This growth has been fueled
by the need for code sharing and other storage functions in a wide array of
digital devices. According to a December 2002 Dataquest report, worldwide flash
memory revenue was $8 billion in 2002 and is expected to grow to $15 billion by
2005.

Our Solution

We are a leading supplier of flash memory semiconductor devices
addressing the needs of high volume electronic applications. We believe our
proprietary flash memory technology, SuperFlash, offers superior performance to
other flash memory solutions. In addition, we believe SuperFlash has benefits
that include high reliability, fast, fixed erase time, the ability to be scaled
to a smaller size and a low-cost manufacturing process.  Many leading technology
companies use our technology in their products including 3Com, Apple, Asustek,
BenQ, Cisco, Dell, FIC, Gigabyte, Huawei, Hyundai, Infineon, Intel, IBM,
Inventec, Legend, LG, Motorola, National Semiconductor, NEC, Nintendo, Nortel,
Panasonic, Philips, Quanta, Samsung, Sanyo, Seagate, Siemens, Sony, Sony
Ericsson, Texas Instruments and VTech. We offer over 90 products based on our
proprietary SuperFlash design and manufacturing process technology. These
products are produced to meet the needs of a wide range of digital consumer,
networking, wireless communications and Internet computing markets. Our product
offerings include standard flash products, application specific memory products,
embedded controllers and mass data storage products. Our memory devices have
densities ranging from 256 Kbit to 32 Mbit and are generally used for the
storage of program code. Our flash embedded microcontrollers support concurrent
flash read-while-write operations using In-Application Programming, or IAP. Our
mass data storage products are used for storing images, music and other data in
devices such as digital cameras and MP3 players.

Our products are manufactured at leading wafer foundries and semiconductor
manufacturers including Samsung, Sanyo, Seiko-Epson, TSMC and Yasu.  We also
work with Oki, Samsung, TSMC and Vanguard to develop new technology for
manufacturing our products.

We license our SuperFlash technology to leading semiconductor companies
including Analog Devices, ATMI, IBM, Motorola, National Semiconductor, NEC, Oki,
Samsung, Sanyo, Seiko-Epson, TSMC and Winbond for applications in semiconductor
devices that integrate flash memory with other functions on a single chip.

Our Strategy

Our objective is to be the leading worldwide supplier of flash memory
devices and intellectual property for program code storage applications. In
addition, we intend to leverage our SuperFlash technology to penetrate the high-density
mass data storage markets. We intend to achieve our objectives by:

Maintaining a leading position in the program code storage market. We
believe that program code storage is an attractive segment of the flash memory
market for a number of reasons. While experiencing continued growth in all
densities, solutions for program code storage applications benefit from the
increasing number and variety of digital electronic applications, longer product
lives and lower density requirements relative to mass data storage applications.
We believe that our proprietary SuperFlash technology is a superior product for
program code storage applications because we believe it offers superior
reliability and performance at a lower cost of manufacture than competing
solutions.

5

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Continuing to enhance our leading flash memory technology. We believe
that our proprietary SuperFlash technology is less complicated, more reliable,
more scalable and more cost-effective than competing flash memory technologies.
Our ongoing research and development efforts are focused on enhancing our
leading flash memory technology by working closely with technology partners who
own wafer fabrication facilities with advanced lithographic and other
manufacturing equipment.

Introducing new products based on SuperFlash. We intend to introduce
new standard memory and various application specific products.  We continue to
develop and expand our ComboMemory family.  ComboMemory is a new class of
devices for wireless and portable applications that combine volatile and
nonvolatile memory on a single monolithic device or multiple dies in a common
package with optimized performance.  We also continue to expand our flash
microcontroller family and Advanced Technology Architecture, or ATA, controller
products.  In 2002, we continued to expand our family of serial flash products
which now includes densities of 512kbit, 1Mbit, 2Mbit and 4Mbit.  For PC BIOS
applications, we are expanding our LPC Firmware Flash product offering to match
all the densities offered in our Firmware Hub, or FWH, products.

Maintaining a leading position in licensing embedded flash technology.
We believe that SuperFlash technology is well-suited for embedded memory
applications, which integrate flash memory and other functions onto a monolithic
chip. We intend to continue to license SuperFlash technology to semiconductor
manufacturers for embedded flash applications, to enhance our technology and to
facilitate integration at higher densities and higher levels of complexity.

Penetrating the high-density mass data storage market. Many digital
electronic devices currently being introduced, such as MP3 players, digital
cameras and PDAs, require high-density flash memory for storing music, pictures
and other data that require mass data storage capacities. We believe that the
market for high-density flash memory is attractive based on its potential size
and growth. We further believe that SuperFlash technology can readily scale to
address this market's needs as they change. We intend to leverage our leading
technology and strong manufacturing partnerships to introduce high-density mass
data storage flash products and to compete effectively in this market.

Leveraging our leading SuperFlash technology to become a premier provider
of wireless memory solutions.

Our Flash Products

Currently, we offer low and medium density devices (256 Kbit to 32
Mbit) that target a broad range of existing and emerging applications in the
digital consumer, networking, wireless communications and Internet computing
markets. Our products are segmented largely based upon attributes such as
density, voltage, access speed, package and target application. We divide our
products into three distinct reportable segments: the Standard Memory Product
Group, or SMPG, the Application Specific Product Group, or ASPG, and the Special
Product Group, or SPG.

SMPG. SMPG includes our three standard flash memory product families:
the Small-Sector Flash, or SSF, family, the Multi-Purpose Flash, or MPF, family,
and the Many-Time Programmable, or MTP, family. These product families allow us
to produce products optimized for cost, functionality and quality to support a
broad range of mainstream applications that use nonvolatile memory products.

ASPG. ASPG includes Concurrent SuperFlash, Serial Flash, FWH and Low
Pin Count, or LPC, flash memory products. These products are designed to address
specific applications such as cellular phones, pagers, PDAs, set-top boxes, hard
disk drives and PCs.  ASPG also includes flash embedded controllers such as the
FlashFlex51 flash microcontroller and the ATA flash disk controller to address
consumer, industrial and mass data storage applications.

SPG. SPG includes ComboMemory, ROM/RAM Combos and other special flash
products.  These products are used in applications requiring low power and a
small form factor such as cellular phones, wireless modems, MP3 systems, pagers
and digital organizers.

6

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Financial information by reportable segment is contained in Note 12 of the
Notes to Consolidated Financial Statements and is incorporated herein by
reference.

Technology Licensing

We license our SuperFlash technology to semiconductor manufacturers
for use in embedded flash applications. We intend to increase our market share
by entering into additional license agreements for our SuperFlash process and
memory cell technology with leading wafer foundries and semiconductor
manufacturers.  We expect to continue to receive licensing fees and royalties
from these agreements.  We design our products using our patented memory cell
technology and fabricate them using our patented process technology.  As of
December 31, 2002, we held 55 patents in the United States relating to certain
aspects of our products and processes, with expiration dates ranging from 2008
to 2021, and have filed for several more. In addition, we hold several patents
in Europe, Japan, Korea, Taiwan and Canada and have filed several foreign patent
applications in Europe, Japan, Korea, Taiwan and Canada.

Customers

We provide high-performance flash memory solutions to customers in
four major markets: digital consumer, networking, wireless communications and
Internet computing. Our customers benefit by obtaining products that we believe
are highly reliable, technologically advanced and have attractive cost
structures. As a result of these highly desirable benefits, we have developed
relationships with many of the industry's leading companies. In digital consumer
products, we provide memory components for consumer companies including Bang
& Olufsen, BenQ, Creative Technologies, Hitachi, Infineon, JVC, LG,
Nintendo, Panasonic, Philips, Samsung, Sanyo, Sharp, Sony, Sony Ericsson,
Thomson Multimedia, TiVo and Yamaha. In networking, we provide memory components
for 3Com, Cisco, E-tech, Intel and Nortel. In wireless communications, we
provide products for companies including Bang & Olufsen, LG, Maxon, RTX,
Vtech and Wistron. In Internet computing, we provide a wide array of memory
components for companies including Asustek, Compal, Dell, FIC, Gigabyte, HP,
IBM, Inventec, LG, Mitac, Quanta, Samsung, Trigem Computer Inc. and Wistron.

The following tables illustrate the geographic regions in which our customers
or licensees operate based on the country to which the product is shipped or
license revenue is generated.

`Year ended December 31,
                                              --------------------------------
                                                2000        2001       2002
                                              ---------  ----------  ---------
United States............................... $  76,898  $   28,592  $  21,871
Europe......................................    28,376      21,332     10,599
Japan.......................................    66,635      23,549     28,465
Korea.......................................    42,986      22,039     30,321
Taiwan......................................   133,677     110,847     91,219
China (including Hong Kong).................    90,839      57,146     70,609
Other Asian countries.......................    48,102      28,157     21,574
Rest of world...............................     2,748       2,368         --
                                              ---------  ----------  ---------
                                             $ 490,261  $  294,030  $ 274,658
                                              =========  ==========  =========`

Sales and Distribution

We sell a majority of our products to customers in Asia through our
manufacturers' representatives. We distribute a majority of our products through
our logistics center.  We also sell and distribute our products in North America
and Europe through manufacturers' representatives and distributors. Our
manufacturer representative and distributor relationships are generally
cancelable, with reasonable notice, by the other party or us.

Applications

As the Digital Consumer, Networking, Wireless Communications and
Internet Computing industries continue to expand and diversify, new applications
are likely to be developed. We believe our products are designed to address this
expanding set of applications:

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`Wireless          Internet
         Digital Consumer             Networking      Communications       Computing
---------------------------------- ----------------- ----------------- ----------------
TV Replayer        Set-top Box     VoIP              Cellular Phone    Network PC
Digital TV         CD-ROM Drive    DSL Modem         Data Pager        Notebook PC
Digital Camera     CD-RW Drive     Cable Modem       Cordless          Palm PC
Digital Camcorder  DVD-ROM Drive   V.90/56K Modem     Telephone        X-PC
DVD Player         DVD-RAM Drive   Wireless LAN      GPS on Cellular   Server
VCD Player         DVD-RW Drive    Network            Phone            PC Firmware Hub
MP3 Player         Web Browser      Interface Card   Bluetooth         Graphics Card
Video Game         Hand-held GPS   Router/Switch      Applications     Printer
PDA                Electronic Toys                                     Copier/Scanner
Electronic Book    Smart Cards                                         Bar Code Scanner
                   Memory Cards                                        Thin Client System`

Manufacturing

We purchase wafers and sorted die from semiconductor manufacturing
foundries, have this product shipped directly to subcontractors for packaging,
testing, and finishing, and then ship the final product to our customers.
Virtually all of our subcontractors are located in Asia.

Wafer and Sorted Die. During 2002, our major wafer fabrication
foundries were TSMC, Sanyo, Samsung and Seiko-Epson.  In 2002, wafer sort, which
is the process of taking silicon wafers and separating them into individual die,
was performed at Acer Testing, Inc., King Yuan Electronics Company, Limited, or
KYE, Lingsen, Samsung, Sanyo, Seiko-Epson and TSMC. Although capacity is not
guaranteed, under these arrangements, we generally receive preferential
treatment regarding wafer pricing and capacity.  In order to obtain, on an
ongoing basis, an adequate supply of wafers, we have considered and will
continue to consider various possible options, including equity investments in
foundries in exchange for guaranteed production volumes, the formation of joint
ventures to own and operate foundries and the licensing of our proprietary
technology. In the first quarter of 2001, we invested $50.0 million in Grace Manufacturing Semiconductor Corporation, or GSMC.
GSMC is located in Shanghai, People's Republic of China.  GSMC is funded mostly
by investors who reside outside of China.  We anticipate that GSMC will begin to
manufacture some of our products during 2003.

Packaging, Testing and Finishing. In the assembly process, the
individual dies are assembled into packages. Following assembly, the packaged
devices require testing and finishing to segregate conforming from nonconforming
devices and to identify devices by performance levels.  Currently, all devices
are tested and inspected pursuant to our quality assurance program at our
domestic or international subcontracted test facilities or at our test
facilities in Sunnyvale, California before shipment to customers.  Certain
facilities currently perform consolidated assembly, packaging, test and
finishing operations all at the same location.  During 2002, most subcontracted
facilities performing the substantial majority of our operations were in Taiwan.
The subcontractors with the largest amount of our activity are KYE, Lingsen, and
Powertech Technology, Incorporated, or PTI. We hold equity investments in three
subcontractors: Apacer Technology, Inc., or Apacer, KYE and PTI. For newly
released products, the initial test and finishing activities are performed at
our Sunnyvale facility.

Research and Development

We believe that our future success will depend in part on the
development of next generation technologies with reduced feature size. During
2000, 2001 and 2002, we spent $41.5 million, $50.4 million and $47.1 million,
respectively, on research and development. Our research efforts are focused on
process development and product development. Our research strategy is to
collaborate with our partners to advance our technologies. We work
simultaneously with several partners on the development of multiple generations
of technologies. In addition, we allocate our resources and personnel into
category-specific teams to focus on new product development. From time to time
we invest in, jointly develop with, license or acquire technology from other
companies in the course of developing products.

8

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Competition

The semiconductor industry is intensely competitive and has been
characterized by price erosion, rapid technological change and product
obsolescence. We compete with major domestic and international semiconductor
companies, many of whom have substantially greater financial, technical,
marketing, distribution, manufacturing and other resources than us. Our low to
medium density memory products, sales of which presently account for
substantially all of our revenues, compete against products offered by Advanced
Micro Devices, or AMD, Atmel, Intel, Macronix, STMicroelectronics and Winbond.
Our high-density memory products, if developed, may compete with products
offered by AMD, Atmel, Fujitsu, Intel, Mitsubishi, Samsung, Sharp Electronics
and Toshiba.  In addition, competition may come from alternative technologies
such as ferroelectric random access memory device, or FRAM, technology.

The competition in the existing markets for some of our product families,
such as the FlashFlex51 microcontroller product family and the ADC, ADM, and
CompactFlash Card product families, is extremely intense. We compete principally
with major companies such as Atmel, Intel, Microchip Technology, Motorola and
Philips in the microcontroller market and with Hitachi, M-Systems and SanDisk in
the memory card and memory module market. We may, in the future, also experience
direct competition from our foundry partners. We have licensed to each foundry
the right to fabricate certain products based on our proprietary technology and
circuit design, and to sell such products worldwide, subject to royalty payments
back to us.

We compete principally on price, reliability, functionality and the ability
to offer timely delivery to customers. While we believe that our low and medium
density products currently compete favorably on the basis of cost, reliability
and functionality, it is important to note that our principal competitors have a
significant advantage over us in terms of greater financial, technical and
marketing resources. Our long-term ability to compete successfully in the
evolving flash memory market will depend on factors both within and beyond our
control, including access to advanced process technologies at competitive
prices, successful and timely product development, wafer supply, product
pricing, actions of our competitors and general economic conditions.

Employees

As of December 31, 2002, we employed 500 individuals on a full-time
basis, all but 59 of whom reside in the United States. Of these 500 employees,
77 were employed in manufacturing support, 278 in engineering, 65 in sales and
marketing and 80 in administration and finance.  Our employees are not
represented by a collective bargaining agreement, nor have we ever experienced
any work stoppage related to strike activity. We believe that our relationship
with our employees is good.

Executive Officers and Directors

The following table lists the names, ages and positions of our
executive officers and directors as of December 31, 2002. There are no family
relationships between any director or executive officer of SST. Executive
officers serve at the discretion of our board of directors.

|Name                                                                                                                                                                    | Age                           | Position                                                                                                                                                                                                                                                                                                                                                                                                                          
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Bing Yeh (1)(4)
Yaw Wen Hu
Derek Best
Michael Briner
Isao Nojima
Paul Lui
Jeffrey L. Garon
Tsuyoshi Taira (1)(2)(3)
Yasushi Chikagami (1)(2)(3)
Ronald Chwang (1)(2)(3) | 52
53
52
55
58
52
42
64
64
54 | President and Chief Executive Officer and Director
Senior Vice President, Operations and Process
Development and Director
Senior Vice President, Sales and Marketing
Senior Vice President, Application Specific Product Group
Vice President, Standard Memory Product Group
Vice President, Special Product Group
Vice President, Finance and Administration and
Chief Financial Officer and Secretary
Director
Director
Director

__________

9

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(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) Member of Stock Option Committee
(4) Sole Member of Non-Officer Stock Option Committee

Bing Yeh, one of our co-founders, has served as our President and
Chief Executive Officer and has been a member of our board of directors since
our inception in 1989. Prior to that, Mr. Yeh served as a senior research and
development manager of Xicor, Inc., a nonvolatile memory semiconductor company.
From 1981 to 1984, Mr. Yeh held program manager and other positions at Honeywell
Inc. From 1979 to 1981, Mr. Yeh was a senior development engineer of EEPROM
technology of Intel Corporation. He was a Ph.D. candidate in Applied Physics and
earned an Engineer degree at Stanford University. Mr. Yeh holds a M.S. and a
B.S. in Physics from National Taiwan University.

Yaw Wen Hu, Ph.D., joined us in July 1993 as Vice President,
Technology Development. In 1997, he was given the additional responsibility of
wafer manufacturing and, in August 1999, he became Vice President, Operations
and Process Development.  In January 2000, he was promoted to Senior Vice
President, Operations and Process Development. Dr. Hu has been a member of our
board of directors since September 1995.  From 1990 to 1993, Dr. Hu served as
deputy general manager of technology development of Vitelic Taiwan Corporation.
From 1988 to 1990, he served as FAB engineering manager of Integrated Device
Technology, Inc. From 1985 to 1988, he was the director of technology
development at Vitelic Corporation.  From 1978 to 1985, he worked as a senior
development engineer in Intel Corporation's Technology Development Group.  Dr.
Hu holds a B.S. in Physics from National Taiwan University and a M.S. in
Computer Engineering and a Ph.D. in Applied Physics from Stanford University.

Derek Best joined us in June 1997 as Vice President of Sales and
Marketing.  In June 2000 he was promoted to Senior Vice President, Sales &
Marketing.  Prior to joining SST he worked for Micromodule Systems, a
manufacturer of high-density interconnect technology, as vice president
marketing and sales world wide from 1992 to 1996.  From 1987 to 1992 he was a
co-founder and owner of Mosaic Semiconductor, a SRAM and module semiconductor
company.  Mr. Best holds an Electrical Engineering degree from Portsmouth
University in England.

Michael Briner joined us as Vice President, Design Engineering in
November 1997, and became Vice President, Products during 1999.  He was promoted
to Senior Vice President of Application Specific Product Group in February 2001.
From 1993 to 1997, he served as vice president of design engineering for Micron
Quantum Devices, Inc., a subsidiary of Micron Technology, Inc., chartered to
develop and manufacture flash memory products.  From 1986 through 1992, he
served as director of design engineering for the Nonvolatile Division of
Advanced Micro Devices, Inc.  In this position, he was instrumental in helping
AMD become a major nonvolatile memory manufacturer.  Mr. Briner holds a B.S. in
Electrical Engineering from the University of Cincinnati.

Isao Nojima joined us as Vice President, Memory Design and Product
Engineering in March 1993 and became Vice President, Advanced Development in
July 1997.  He became Vice President of Standard Memory Product Group in July
2000.  From 1990 to 1993, Mr. Nojima served as director of design engineering of
Pioneer Semiconductor Corporation, now called Pericom, a manufacturer of
semiconductors.  From 1980 to 1990, he served as design manager of Xicor Inc., a
nonvolatile semiconductor company.  From 1977 to 1980, he served as a senior
design engineer for Intel Corporation.  From 1969 to 1976, he was a senior
researcher at Toshiba's R&D Center in Japan.  Mr. Nojima holds a B.S. and a
M.S. in Electrical Engineering from Osaka University in Japan.

Paul Lui joined us as Vice President and General Manager of the Linvex
Product Line in June 1999 and became Vice President, Special Product Group in
June 2001.  From 1994 to 1999, he was the president and founder of Linvex
Technology Corporation. From 1987 to 1994, he was the president and chief
executive officer of Macronix, Inc. From 1981 to 1985, he served as group
general manager at VLSI Technology, Inc. where he was responsible for
transferring that company's technology to Korea. In addition, Mr. Lui has held
senior engineering positions at the Synertek Division of Honeywell and McDonnell
Douglas. Mr. Lui holds a M.S.E.E. degree from University of California, Berkeley
and a B.S. degree in Electrical Engineering and Mathematics from California
Polytechnic State University, San Luis Obispo.

Jeffrey L. Garon joined us as Chief Financial Officer and Vice
President, Finance and Administration and Secretary in March 1998.  From 1994 to
1998, Mr. Garon served as president and senior operating officer of the Garon
Financial Group, Inc., a venture capital and venture consulting firm
specializing in start-ups, turnarounds and restarts.  From 1993 to 1994, he
served as a vice president and chief financial officer of Monster Cable

10

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Tsuyoshi Taira has been a member of our board of directors since July
1993. Mr. Taira served as president of Sanyo Semiconductor Corporation from 1986
to 1993.  Mr. Taira was chairman of the Sanyo Semiconductor Corporation from
1993 to 1996.  Mr. Taira left the Sanyo Semiconductor Corporation in August,
1996.  Mr. Taira currently owns and runs a marketing and management consulting
company, Tazan International, Inc.  Mr. Taira holds a B.S. from Tokyo
Metropolitan University.

Yasushi Chikagami has been a member of our board of directors since
September 1995.  Mr. Chikagami has been chairman of Arise, Inc since 2000.  Mr.
Chikagami has also served as director of World Peace Group International Ltd.
since 2002 and Trident Microsystems, Inc. since 1993.  Mr. Chikagami holds a
B.S. in Agricultural Engineering from Taiwan University and a M.S. in
engineering from University of Tokyo.

Ronald Chwang, Ph.D., has been a member of our board of directors
since June 1997.  Dr. Chwang has been the Chairman and President of Acer
Technology Ventures, America, a venture capital management company, since 1997.
Dr. Chwang currently serves actively on the board of directors of several
private companies.  He also serves on the board of ALi Corporation (previously called Acer Laboratories Inc.), Ambit
Microsystems Corp. in Taiwan and ATI Technologies Inc. in Canada since February 2003.  From 1986 to
1997, Dr. Chwang was with various Acer entities, serving in executive positions
leading business units engaged in ASIC products, computer peripherals, and Acer-Altos
server system, including from 1992 to 1997 as president and chief
executive officer of Acer America Corporation.   Before joining the Acer
entities, Dr. Chwang worked for several years in development and management
positions at Intel in Oregon and Bell Northern Research in Ottawa, Canada.  Dr.
Chwang holds a B.S. in Electrical Engineering from McGill University and a Ph.D.
in Electrical Engineering from the University of Southern California.

Available Information

We were incorporated in California in 1989.  We make available free
of charge on or through our Internet website,
http://www.sst.com, our
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and, if applicable, amendments to those reports filed or furnished
pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the SEC.

Item 2. Properties

As of January 31, 2003, we leased six major facilities totaling
approximately 188,000 square feet in Sunnyvale, California in which our
executive offices, principal manufacturing engineering, research and development
and testing facilities are located. In Sunnyvale we currently occupy five of
these facilities totaling approximately 168,000 square feet. The leases on five
facilities expire in 2005 and the lease on one facility expires in 2010.  We
also have approximately 20,000 square feet of office space in various
international sites with expiration dates ranging from 2003 to 2012.  We believe
these facilities are adequate to meet our needs for at least the next 12
months.

Item 3. Legal Proceedings

On January 3, 1996, Atmel Corporation sued us in the U.S. District Court
for the Northern District of California. Atmel's complaint alleged that we
willfully infringe five U.S. patents owned by or exclusively licensed to Atmel.
Atmel later amended its complaint to allege infringement of a sixth patent.
Regarding each of these six patents, Atmel sought a judgment that we infringe
the patent, an injunction prohibiting future infringement, and treble damages,
as well as attorney's fees and expenses.

On two of the six patents, the District Court ruled by summary judgment that
we did not infringe. Two of the other patents were invalidated by another U.S.
District Court in a proceeding to which we were not a party, but this decision
was later reversed by the Federal Circuit Court of Appeals.  As discussed below,
as the result of a ruling in another case, Atmel has withdrawn its allegations
as to another patent ("the '747 patent").

11

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On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our parts, involving four of the
six patents that Atmel alleged that we infringed in the District Court case
above. We intervened as a party to that investigation.

On October 16, 2000, the ITC found the '903 patent valid and infringed, and
ruled that we could not import into the United States certain products that use
the claimed circuit made by one of our suppliers. The ITC also ruled that we do
not infringe the '811 and '829 patents. We appealed from the Limited Exclusion
Order, and in August 2001 the Court of Appeals for the Federal Circuit issued an
opinion giving its reasons for denying that appeal. The '903 patent and the
ITC's Limited Exclusion Order expired on September 14, 2001.

On January 14, 2002, the court in Atmel Corp. v. Macronix America,
Inc. denied Atmel's motion to correct the '747 patent. We intervened as a
party in the Macronix case for purposes of opposing that motion. As a result of
the Court's decision, Atmel withdrew its claims against us based on the '747
patent.

A jury trial on the '811 and '829 patents began on April 8, 2002.  The jury
found that we willfully infringed those patents, and awarded Atmel $20.0 million
in actual damages.  On May 7, 2002, the Court entered judgment in the total
amount of $36.5 million, which includes the original $20.0 million.  The '811
and '829 patents expired in February 2002.  Therefore, we are not precluded from
selling any of our products.  We believe that there were significant errors in
both the infringement and the damages verdicts, and filed a Notice of Appeal on
July 16, 2002.  On October 7, 2002, we filed our opening brief in that appeal.
Our final reply brief was filed on January 16, 2003.  Atmel filed its final
brief on January 30, 2003.  The Court of Appeals will likely schedule oral
arguments sometime in 2003.  We do not expect a decision until sometime in
mid-to-late 2003.  Atmel has agreed to stay its enforcement of this judgment pending
our appeal.  In July 2002, we posted a bond in the amount of $36.5 million
pending the appeal.  In connection with the bond, we have pledged cash, cash
equivalents and available-for-sale investments in the amount of $36.5 million.
As of December 31, 2002, this amount is included in restricted cash, cash
equivalents and available-for-sale investments in our balance sheet.

Trial on the '903 patent was severed and heard before a jury beginning on
July 29, 2002.  The court ruled that we infringed that patent, so the jury was
asked to decide whether the patent is valid and, if so, assess what, if any,
damages are due Atmel.  The jury was unable to unanimously decide whether the
'903 patent is valid, and a mistrial was declared.  The Court denied Atmel's
request to schedule a retrial until the appeals of the verdict regarding the
'811 and '829 patents are decided.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business. We have incurred certain costs while defending
these matters.  There can be no assurance the Atmel complaint or other third
party assertions will be resolved without costly litigation, in a manner that is
not adverse to our financial position, results of operations or cash flows or
without requiring royalty payments in the future which may adversely impact
gross margins. No estimate can be made of the possible loss or possible range of
loss associated with the resolution of these contingencies. 
As a result, no losses have been accrued in our financial statements as of
December 31, 2002.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted during the fourth quarter to a vote of security
holders.

12

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PART II



Item 5. Market for Registrant's Common Stock and Related
Shareholder Matters

Price Range of Common Stock

The principal U.S. market for our Common Stock is The Nasdaq Stock
Market's National Market. The only class of our securities that is traded is our
Common Stock. Our Common Stock has traded on The Nasdaq Stock Market's National
Market since November 21, 1995, under the symbol SSTI. The following table sets
forth the quarterly high and low closing sales prices of the Common Stock for
the period indicated as reported by The Nasdaq Stock Market. These prices do not
include retail mark-ups, markdowns, or commissions. The closing sales price of
our Common Stock on December 31, 2002, the last trading day in 2002, was $4.04.





|2001                                                          |                                                                                                              | High Close                               | Low Close                           
|------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------------------------------------
|First Quarter:
Second Quarter:
Third Quarter:
Fourth Quarter: | January 1 - March 31, 2001
April 1 - June 30, 2001
July 1 - September 30, 2001
October 1 - December 31, 2001 | $ 19.00
     12.01
     10.09
     14.02 | $ 8.63
     5.90
     4.03
     4.35
|2002                                                          |                                                                                                              | High Close                               | Low Close                           
|First Quarter:
Second Quarter:
Third Quarter:
Fourth Quarter: | January 1 - March 31, 2002
April 1 - June 30, 2002
July 1 - September 30, 2002
October 1 - December 31, 2002 | $ 11.25
     12.51
      7.32
      7.50 | $ 6.52
    7.80
    3.91
    2.90   
|2003                                                          |                                                                                                              | High Close                               | Low Close                           
|First Quarter:                                                | January 1 - March 14, 2003                                                                                   | $ 4.78                                   | $ 2.25                              

Approximate Number of Equity Security
Holders

As of December 31, 2002, there were approximately 255
record holders of our Common Stock.

Dividends

We have never paid a cash dividend on our Common Stock and we intend
to continue to retain earnings, if any, to finance future growth. Accordingly,
we do not anticipate the payment of cash dividends to holders of Common Stock in
the foreseeable future.

Equity Compensation Plan Information

Information regarding our equity compensation plans will be contained
in our definitive Proxy Statement with respect to our Annual Meeting of
Shareholders under the caption "Compensation - Equity Compensation Plan
Information," and is incorporated by reference into this report.  All of our
equity compensation plans have been approved by our shareholders.

13

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Item 6. Selected Consolidated Financial Data

The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and the
notes thereto included elsewhere in this report.  Certain amounts in our prior
years consolidated financial statements have been reclassified to conform to the
current year presentation.  These reclassifications have no impact on our
previously reported net income (loss).

`Year ended December 31,
                                               -----------------------------------------------------
                                                 1998       1999       2000       2001       2002
                                               ---------  ---------  ---------  ---------  ---------
                                                      (in thousands, except per share data)

Consolidated Statements of Operations Data:
Net revenues:
    Product revenues - unrelated parties..... $  51,611  $  99,769  $ 408,708  $ 168,593  $ 100,620
    Product revenues - related parties.......    15,264     18,473     66,608     90,025    143,401
    License revenues.........................     2,536      6,552     14,945     35,412     30,637
                                               ---------  ---------  ---------  ---------  ---------
      Total net revenues.....................    69,411    124,794    490,261    294,030    274,658
Cost of revenues.............................    62,703     94,652    264,139    248,161    206,246
                                               ---------  ---------  ---------  ---------  ---------
Gross profit.................................     6,708     30,142    226,122     45,869     68,412
                                               ---------  ---------  ---------  ---------  ---------
Operating expenses:
    Research and development.................    14,527     18,199     41,535     50,380     47,069
    Sales and marketing......................     7,290     10,576     27,968     26,794     25,498
    General and administrative...............     4,592      3,800     14,966     17,855     17,097
    Other....................................        --      2,011      3,911      1,346         --
                                               ---------  ---------  ---------  ---------  ---------
      Total operating expenses...............    26,409     34,586     88,380     96,375     89,664
                                               ---------  ---------  ---------  ---------  ---------
Income (loss) from operations................   (19,701)    (4,444)   137,742    (50,506)   (21,252)
Interest and other income....................     1,573        730     10,510      7,350      3,197
Interest expense.............................       (31)      (214)      (691)      (338)      (214)
Impairment of equity investments.............        --         --         --     (3,274)    (7,757)
                                               ---------  ---------  ---------  ---------  ---------
Income (loss) before provision for
    (benefit from) income taxes..............   (18,159)    (3,928)   147,561    (46,768)   (26,026)
Provision for (benefit from) income taxes....      (571)        88     41,813    (17,772)   (10,931)
                                               ---------  ---------  ---------  ---------  ---------
Net income (loss)............................ $ (17,588) $  (4,016) $ 105,748  $ (28,996) $ (15,095)
                                               =========  =========  =========  =========  =========
Net income (loss) per share - basic.......... $   (0.26) $   (0.06) $    1.23  $   (0.32) $   (0.16)
                                               =========  =========  =========  =========  =========
Net income (loss) per share - diluted........ $   (0.26) $   (0.06) $    1.13  $   (0.32) $   (0.16)
                                               =========  =========  =========  =========  =========

Consolidated Balance Sheet Data:
Total assets................................. $  56,138  $  88,806  $ 512,590  $ 446,760  $ 440,606
                                               =========  =========  =========  =========  =========
Long-term obligations........................ $     663  $     446  $     279  $   1,793  $   1,873
                                               =========  =========  =========  =========  =========
Shareholders' equity......................... $  38,030  $  41,015  $ 416,635  $ 391,411  $ 381,851
                                               =========  =========  =========  =========  =========`

14

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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations

Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. All forward-looking statements included in this document are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those discussed. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
below under the heading "Business Risks", as well as those discussed elsewhere
in this report.

Overview

We are a leading supplier of flash memory semiconductor devices for
the digital consumer, networking, wireless communication and Internet computing
markets.

The semiconductor industry has historically been cyclical, characterized by
periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated declines of selling prices.  In some
cases, downturns, such as the one we have experienced since late 2000, have
lasted for more than a year.  Our business could be further harmed by industry-wide
prolonged downturns in the future.

Our product sales are made primarily using short-term cancelable purchase
orders. The quantities actually purchased by the customer, as well as shipment
schedules are frequently revised to reflect changes in the customer's needs and
in our supply of product.  Accordingly, our backlog of open purchase orders at
any given time is not a meaningful indicator of future sales.  Changes in the
amount of our backlog do not necessarily reflect a corresponding change in the
level of actual or potential sales.

We derived 77.6%, 80.7% and 88.5% of our net product revenues during 2000, 2001
and 2002, respectively, from product shipments to Asia. Additionally,
substantially all of our wafer suppliers and packaging and testing
subcontractors are located in Asia.

Our top ten end customers, which excludes transactions through stocking
representatives and distributors, accounted for 19.3%, 31.5% and 36.8% of our
net product revenues in 2000, 2001 and 2002, respectively.

No single end customer, which we define as original equipment manufacturers,
or OEMs, original design manufacturers, or ODMs, contract electronic
manufacturers, or CEMs, or end users, represented 10.0% or more of our net
product revenues during 2000, 2001 and 2002.

Since March 2001, we have been increasing our out-sourcing activities for our
customer service logistics to support our customers.  Currently Silicon
Professional Technology Ltd., or SPT, supports our customers in Taiwan, China
and other Southeast Asia countries.  SPT provides planning, warehousing,
delivery, billing, collection and other logistic functions for us in these
regions.  SPT is a wholly-owned subsidiary of one of our stocking
representatives in Taiwan, Professional Computer Technology Limited, or PCT.
Please see a description of our relationship with PCT under "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Related Party Transactions."

Products shipped to SPT are accounted for as consigned inventory, and revenue
is recognized when the products have been delivered and are considered as a sale
to our end customers by SPT. For the years ended December 31, 2001 and 2002, SPT
serviced end customer sales accounting for 29.7% and 57.4% of our net product
revenues recognized. We ship products to, and have accounts receivable from,
OEMs, ODMs, CEMs, stocking representatives, distributors, and our logistics
center. Our stocking representatives, distributors and logistics center reship
our products to our end customers, including OEMs, ODMs, CEMs and end users. No
stocking representative or distributor serviced more than 10.0% of our end
customer sales in 2000, 2001 or 2002.

As of December 31, 2001, SPT, our logistics center, represented 48.8% of our
accounts receivable and Actron Technology Co., a stocking representative,
represented 21.9% of our accounts receivable.  As of December 31, 2002, SPT
represented 68.5% of our accounts receivable.

15

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Results of Operations: Years Ended December 31, 2000, 2001 and 2002

Net Revenues

Net revenues were $274.7 million in 2002 compared to $294.0 million in
2001 and $490.3 million in 2000.  Net revenues for 2002 decreased compared to
2001 primarily due to decreased average selling prices for our products,
partially offset by increased unit shipments.  Net revenues decreased from 2000
to 2001 due to decreased unit shipments of our products and due to decreased
average selling prices. Average selling prices fluctuate due to a number of
factors including the overall supply and demand for our products in the
marketplace, maturing product cycles and changes in general economic conditions.

Product Revenues. Product revenues were $244.0 million in 2002, $258.6
million in 2001 and $475.3 million in 2000.  Product revenues for 2002 decreased
compared to 2001 primarily due to decreased average selling prices by
approximately 36.5%, partially offset by increased unit shipments of our
products by approximately 31.6%.  The decrease from 2000 to 2001 was primarily
due to decreased unit shipments of our products by approximately 15.8% and
decreased average selling prices for our products of approximately 29.1%.
Shipping volumes fluctuate due to overall industry supply and demand.

License Revenues. Revenues from license fees and royalties were $30.6
million in 2002, $35.4 million in 2001 and $14.9 million in 2000.  On October 1,
2000, we announced a settlement in our lawsuit with Winbond Electronics of
Taiwan.  During 2000 and 2001, Winbond paid us $10.4 million and $20.0 million,
respectively, under a settlement agreement.  No further back royalty payments
are required after 2001 under this legal settlement.  Although the settlement
payments have ceased, Winbond continues to pay royalties.  The decrease from
2001 to 2002 was primarily due to the termination of license fees received as
part of our legal settlement with Winbond during 2001, offset by increases in
upfront license fees and royalty payments received from our licensees during
2002.  The increase from 2000 to 2001 was primarily due to license fees received
from Winbond as part of a legal settlement totaling $20.0 million in 2001.  We
anticipate that license revenues may fluctuate significantly in the future.

Gross Profit

Gross profit was $68.4 million, or gross margin of 24.9% of net revenues,
in 2002, $45.9 million, or 15.6% of net revenues, in 2001, and $226.1 million,
or 46.1% of net revenues, in 2000. The increase in gross profit in 2002 when
compared to 2001 is due primarily to a $72.2 million inventory valuation
adjustment recorded in 2001.  Gross profit in 2002 was reduced by decreases in
average selling prices by approximately 36.5% and decreases in license revenues
by $4.8 million.  Gross profit decreased from 2000 to 2001 primarily due to
inventory valuation adjustments of $72.2 million recorded in 2001, decreases in
unit shipments by approximately 15.8%, decreases in average selling prices by
approximately 29.1% and increases in anticipated warranty costs.  In 2002, we
recorded inventory valuation adjustments of $8.3 million. In 2000, we wrote down
$4.3 million of inventory related to lower of cost or market and products that
we determined to be excess or obsolete.  Product gross margin was 15.5% in 2002,
compared to 4.0% in 2001 and 47.6% in 2000. The increase in product gross margin
from 2001 to 2002 relates to a $72.2 million inventory valuation adjustment
recorded in 2001.  Gross margin in 2002 was reduced by decreased average selling
prices of our products by approximately 36.5%.  The decrease in product gross
margin from 2000 to 2001 was primarily due to decreased average selling prices
of our products by approximately 29.1% and a $72.2 million inventory valuation
adjustment recorded in 2001. For other factors affecting our gross profit,
please also see "Business Risks - We incurred significant inventory valuation
adjustments in 2001 and 2002 and we may incur additional significant inventory valuation
adjustments in the future."

Operating Expenses

Operating expenses consist of research and development, sales and
marketing, general and administrative and other expenses.  Operating expenses
were $89.7 million, or 32.6% of net revenues, in 2002, as compared to $96.4
million or 32.8% of net revenues, in 2001, and $88.4 million, or 18.0% of net
revenues, in 2000.  The decrease from 2001 was primarily due to decreases of
$2.3 million in wafer and mask expenses, $2.5 million in non-production
engineering material expenses and $1.9 million in commissions expenses.  The
increase from 2000 to 2001 was due to hiring additional personnel, development
of new products, improvements in our infrastructure, an increase in our bad debt
expense, and an increase in our legal expenses in connection with the Atmel
litigation, offset by the lack of profit sharing expenses. We anticipate that we
will continue to devote substantial resources to research and development, sales
and marketing and to general and administrative activities, and that these

16

---

Research and development. Research and development expenses include
costs associated with the development of new products, enhancements to existing
products, quality assurance activities and occupancy costs.  These costs consist
primarily of employee salaries and benefits and the cost of materials such as
wafers and masks.  Research and development expenses were $47.1 million, or
17.1% of net revenues, in 2002, as compared to $50.4 million, or 17.1% of net
revenues, in 2001, and $41.5 million, or 8.5% of net revenues, in 2000.  Research
and development expenses decreased from 2001 to 2002 by approximately 6.6%
primarily due to decreases in wafer and mask expenses of approximately $2.3
million, non-production engineering material expenses of approximately $2.5
million and outside service expenses of approximately $910,000, offset by
increased headcount and related costs of approximately $2.1 million.
The increase in research and development expenses from 2000 to 2001
by approximately 21.3% was primarily due to increases in headcount and related
costs of approximately $11.0 million, non-production engineering material
expenses of approximately $2.6 million, depreciation related to purchases of new
engineering equipment of $2.6 million, design costs of approximately $1.4
million and increased expenses related to engineering and mask costs of
approximately $500,000, offset by a decrease in profit sharing expenses of
approximately $8.9 million. We expect research and development expenses may
increase in dollars.

Sales and marketing. Sales and marketing expenses consist primarily of
commissions, headcount and related costs, as well as travel, entertainment and
promotional expenses.  Sales and marketing expenses were $25.5 million, or 9.3%
of net revenues, in 2002, as compared to $26.8 million, or 9.1% of net revenues,
in 2001, and $28.0 million, or 5.7% of net revenues, in 2000.  The decrease in
sales and marketing expenses from 2001 to 2002 by approximately 4.8% was
primarily due to decreased commissions expenses for the current year of
approximately $1.9 million primarily due to decreased product revenues and
decreased marketing expenses of approximately $692,000, offset by increased
headcount and related costs of approximately $1.2 million, including a $510,000
expense recorded for a bonus to our senior vice president of sales and marketing.
The decrease in sales and marketing expenses from 2000 to 2001 by
approximately 4.2% was primarily due to decreases in commissions of
approximately $2.3 million and profit sharing expenses of approximately $2.8
million, offset by increases in headcount related costs of approximately $3.3
million and patent costs of approximately $756,000.  We expect sales and
marketing expenses may increase in dollars as we continue to expand our sales
and marketing efforts.  In addition, fluctuations in revenues will cause
fluctuations in sales and marketing expenses as it impacts our commissions
expenses.

General and administrative. General and administrative expenses
consist of salaries and related costs for administrative, executive and finance
personnel, recruiting costs, professional services and legal fees and allowances
for doubtful accounts.  General and administrative expenses were $17.1 million,
or 6.2% of net revenues, in 2002, as compared to $17.9 million, or 6.1% of net
revenues, in 2001, and $15.0 million, or 3.1% of net revenues, in 2000. The
decrease in general and administrative expenses from 2001 to 2002 by
approximately 4.2% was primarily due to decreased professional service expenses
of approximately $1.0 million and decreased bank fees of approximately $486,000,
offset by increased bad debt expenses of approximately $795,000.  General and
administrative expenses increased from 2000 to 2001 by approximately 19.3%
primarily due to increases in expenses related to bad debt expenses of
approximately $1.8 million, headcount and related costs of approximately $2.0
million, and depreciation and amortization of approximately $838,000, offset by
a decrease in profit sharing expenses of approximately $2.1 million. We
anticipate that general and administrative expenses may increase in dollars as
we scale our facilities, infrastructure, and headcount to support our overall
expected growth. We may also incur additional expenses in connection with the
Atmel litigation. For further information on this litigation see "Legal
Proceedings."

Other operating expenses.  There was no other operating expenses
recorded in 2002.  In 2001, other operating expenses of $1.3 million, or 0.5% of
net revenues, was comprised of $590,000 related to an expense for impairment of
intangible assets and a $756,000 period charge related to an operating lease for
an abandoned building. This charge represents the estimated difference between
the total non-discounted future sublease income and our non-discounted lease
commitments relating to this building. The charge is an estimate and may be
adjusted if we obtain a sublease for the building and the actual sublease income
is significantly different from the estimate. We may be unable to secure
subtenants for such space due to the recent decrease in demand for commercial
rental space in Silicon Valley. If we are not successful in subleasing our
unused office space, we may be required to take an additional period charge for
the balance of the future lease cost.

A charge of $3.9 million, or 0.8% of net revenues, in 2000, relates to the
expense for in-process research and development incurred during the acquisition
of Agate Semiconductor Inc.  Refer also to Note 8 of the Notes to the
Consolidated Financial Statements. The fair value of Agate's patents, workforce,
and the technology then under development was determined by an independent

17

---

We expected the project to be completed and to begin to generate cash flows
within 12 to 18 months from the date of the acquisition. However, development of
this flash memory device and its viability remained a significant risk due to
the remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products and significant competitive
threats from numerous companies.  Failure to bring this device to market in a
timely manner could result in a lost opportunity to capitalize on emerging
markets. Failure to achieve the expected levels of revenues and net income from
this flash memory device may negatively impact the return on the investment
expected at the time of the acquisition and potentially result in impairment of
other assets related to the development activities.

During the quarter ended December 31, 2001, due to the delays in completing
this first flash memory device using the Agate technology, we recorded an
expense for impairment of intangible assets of $590,000. The assets related to
patents acquired as part of the acquisition of Agate Semiconductor Inc. in
December 2000. We reviewed the recoverability of the recorded amounts based on
expected future cash flows (un-discounted and before interest) from use of these
assets and then determined the impairment loss of $590,000 based on the
difference between the net book value of the assets and the estimated fair value
of the assets.

Interest and other income. Interest and other income was approximately
$3.2 million, or 1.2% of net revenues, during 2002, as compared to $7.4 million,
or 2.5% of net revenues, during 2001, and $10.5 million, or 2.1% of net
revenues, during 2000.  Interest income decreased in dollars from 2001 to 2002
primarily due to decreasing interest rates on invested cash.  Interest income
decreased from 2000 to 2001 due to a decrease in cash, cash equivalents and
available-for-sale investments and due to declined interest rates.

Interest expense.  Interest expense was approximately $214,000 during
2002 as compared to $338,000 during 2001 and $691,000 during 2000.  Interest
expense in 2002 and 2001 relates to interest and fees under our line of credit
and to our notes payable.  We terminated our line of credit in July 2002.
Interest expense in 2000 relates to borrowing prior to the completion of a
follow-on public offering and to fee activity under our line of credit.

Impairment of equity investments.  In 2000, we acquired a 10.0%
interest in Apacer, a privately held company located
in Taiwan that designs, manufactures and markets memory modules, for
approximately $9.9 million in cash.  Our investment in Apacer was valued at
cost.  Bing Yeh, our President and CEO and Board Director, is a member of
Apacer's Board of Directors.  In 2001, we invested an additional $2.1 million in
Apacer.  In August 2002, we made an additional investment of $181,000.  At the
end of the third quarter of 2002, we determined that a continued and significant
decline in Apacer's price per share was other than temporary, and accordingly,
in the third quarter of 2002, we recorded a period charge to impairment of
equity investments of approximately $7.8 million to write down our investment in
Apacer to $4.4 million which was determined using the price per share paid for
the additional investment in August 2002.

During 2001, KYE, a company in which we have an investment, completed an
initial public offering on the Taiwan Stock Exchange.  Since the initial public
offering there had been a significant decline in the market value of the
investment. We had concluded that the decline in value is "other-than-temporary"
and a write down of $3.3 million was necessary as of December 31, 2001. The
investment was written down to $1.3 million based on the quoted market price as
of December 31, 2001. As of December 31, 2002, the recorded value of our KYE
investment was approximately $1.4 million based on the quoted market price as of
the balance sheet date.

18

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Provision for (Benefit from) Income Taxes

Our income tax benefit of $10.9 million in 2002 consisted of a 42.0% tax
rate on our loss before income taxes.  In 2001, our income tax benefit of $17.8
million consisted of a 38.0% tax rate on loss before income taxes. This compares
with provision for income taxes of approximately $41.8 million, or 28.3%, in
2000. In 2003, we plan to implement an international tax structure. We expect
our tax rate for 2003 to be zero percent.  Our tax rate may change depending on
our profitability and the timing of the implementation of certain tax planning
strategies.  As of December 31, 2002, we have total short-term and long-term
deferred tax assets of $22.3 million.  If we continue to incur net losses in the
future and the realization of the deferred tax assets through future taxable
income becomes uncertain, we may be required to provide a valuation allowance
for our deferred tax assets.  See Note 11 of the Notes to the Consolidated
Financial Statements.

Segment Reporting

We manage our business in four reportable segments: SMPG, ASPG, SPG and
Technology Licensing.  Refer to Note 12 of the Notes to the Consolidated
Financial Statements for revenue and gross profit information by reportable
segment.

SMPG includes our three standard flash memory product families: the SSF
family, the MPF family and the MTP family.  SMPG revenues increased from $152.2
million in 2001 to $169.0 million in 2002 primarily due to increased unit
shipments, offset by decreased average selling prices.  Gross margin increased
from negative 21.7% in 2001 to 7.5% in 2002 for this segment primarily due to
the inventory valuation adjustments to cost of sales during 2001 and changes in
product mix.  SMPG revenues decreased from $401.2 million in 2000 to $152.2
million in 2001 due primarily to decreased unit shipments and lower average
selling prices. Gross margin decreased from 42.5% in 2000 to negative 21.7% in
2001 for this segment primarily due to the inventory valuation adjustments to
cost of sales during 2001, decreased unit shipments and decreased average
selling prices.

ASPG includes Concurrent SuperFlash, Serial Flash, FWH and LPC flash
products. ASPG also includes flash embedded controllers such as the FlashFlex51
flash microcontroller and the ATA controller.  ASPG revenues decreased from
$98.1 million in 2001 to $68.6 million in 2002 primarily due to decreased average selling prices
offset by increased unit shipments. Gross margin decreased
from 44.6% in 2001 to 34.3% in 2002 primarily due to decreased average selling prices
and changes in product mix.  ASPG revenues increased from $56.4 million in 2000
to $98.1 million in 2001 due primarily to increased unit shipments of our FWH
products, which were introduced in early 2000. Gross margin decreased from 58.6%
in 2000 to 44.6% in 2001 due to decreased average selling prices and inventory
valuation adjustments to cost of sales in 2001.

SPG includes ComboMemory, ROM/RAM Combos and other special flash products.
SPG revenues decreased from $8.2 million in 2001 to $6.4 million in 2002
primarily due to decreases in unit shipments and average selling prices.  Gross
margin increased from negative 4.8% in 2001 to 24.5% in 2002 for this segment
due to changes in the mix of the types of products sold between the reporting
periods and inventory valuation adjustments to cost of sales in 2001.  SPG
revenues decreased from $17.8 million in 2000 to $8.2 million in 2001 due
primarily to decreased unit shipments and lower average selling prices. Gross
margin decreased from 42.8% in 2000 to negative 4.8% in 2001 for this segment
due to changes in the mix of the types of products sold between the reporting
periods and inventory valuation adjustments to cost of sales in 2001.

Revenue and gross profit related to Technology Licensing was $30.6 million
for 2002, $35.4 million for 2001 and $14.9 million for 2000.  On October 1,
2000, we announced a settlement of our lawsuit with Winbond Electronics of
Taiwan.  During 2000 and 2001, Winbond paid us $10.4 million and $20.0 million,
respectively, under a settlement agreement.  No further back royalty payments
are required after 2001 under this legal settlement.  Although the settlement
payments have ceased, Winbond continues to pay royalties.  The decrease from
2001 to 2002 was primarily due to the termination of license fees received as
part of our legal settlement with Winbond during 2001, offset by increases in
upfront license fees and royalty payments received from our licensees during
2002.  The increase from 2000 to 2001 was primarily due to license fee received
from Winbond as part of a legal settlement totaling $20.0 million in 2001.  We
anticipate that license revenues will fluctuate significantly in the future.

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Related Party Transactions

The following table is a summary of our related party revenues and
purchases (in thousands):



`Year Ended
                                                December 31, 2002
                                              ---------------------
                                              Revenues    Purchases
                                              ---------  ----------
Silicon Technology Co., Ltd................. $   2,089  $       --
Ambit Microsystems Corp.....................       269          --
Apacer Technology, Inc......................       899         588
Professional Computer Technology Limited....       141          --
Silicon Professional Technology Ltd.........   140,003          --
King Yuan Electronics Company, Limited......        --      18,163
Powertech Technology, Incorporated..........        --       8,378
                                              ---------  ----------
                                             $ 143,401  $   27,130
                                              =========  ==========

                                                   Year Ended
                                                December 31, 2001
                                              ---------------------
                                              Revenues    Purchases
                                              ---------  ----------
Silicon Technology Co., Ltd................. $   3,728  $       --
Acer and related entities (1)...............     5,129         290
Apacer Technology, Inc......................       280         626
Professional Computer Technology Limited....     4,019          --
Silicon Professional Technology Ltd.........    76,869          --
King Yuan Electronics Company, Limited......        --      21,827
Powertech Technology, Incorporated..........        --       9,031
                                              ---------  ----------
                                             $  90,025  $   31,774
                                              =========  ==========

                                                   Year Ended
                                                December 31, 2000
                                              ---------------------
                                              Revenues    Purchases
                                              ---------  ----------
Silicon Technology Co., Ltd................. $  12,047  $       --
Acer and related entities (1)...............    21,280           6
Apacer Technology, Inc......................       447           8
Ocean Contract Manufacturing Ltd............     1,441          --
Professional Computer Technology Limited....    22,348          --
King Yuan Electronics Company, Limited......        --      16,721
Powertech Technology, Incorporated..........     9,044       9,478
                                              ---------  ----------
                                             $  66,608  $   26,213
                                              =========  ==========`

(1) Excludes Apacer Technology, Inc. balances.

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The following table is a summary of our related party accounts receivable and
accounts payable and accruals (in thousands):

`December 31, 2001      December 31, 2002
                                              ---------------------  ---------------------
                                                          Accounts               Accounts
                                              Accounts   Payable and Accounts   Payable and
                                              Receivable  Accruals   Receivable  Accruals
                                              ---------  ----------  ---------  ----------
Silicon Technology Co., Ltd................. $     192  $       --  $     459  $       --
Acer and related entities (1)...............       524          87         --          --
Ambit Microsystems Corp.....................       113          --         --          --
Apacer Technology, Inc......................       128          27        141         119
Professional Computer Technology Limited....        --         896         --          73
Silicon Professional Technology Ltd.........    19,839         863     24,648         432
King Yuan Electronics Company, Limited......        --       3,621         --       4,285
Powertech Technology, Incorporated..........        --       2,523         --       2,253
                                              ---------  ----------  ---------  ----------
                                             $  20,796  $    8,017  $  25,248  $    7,162
                                              =========  ==========  =========  ==========`

(1) Excludes Ambit Microsystems Corp. and Apacer Technology, Inc. balances.

In 1996, we acquired a 14% interest in Silicon Technology Co., Ltd., or
Silicon Technology, a privately held Japanese company, for approximately
$939,000 in cash. Bing Yeh our President, CEO and Board Director also is a
member of Silicon Technology's board. We acquired the interest in Silicon
Technology in order to provide a presence for our products in Japan. We now have
our own office in Japan, although Silicon Technology continues to sell our
products to smaller customers. At December 31, 2002, our investment, which is
carried at cost, represented approximately 9% of the outstanding equity of
Silicon Technology. Our sales to Silicon Technology were made at prevailing
market prices and the payment terms are consistent with the payment terms
extended to our other customers. We are not obligated to provide Silicon
Technology with any additional financing.

Dr. Ronald Chwang, a member of our Board of Directors, is also a director of
Ambit Microsystems Corp., which is a related entity of Acer Incorporated, or
Acer.

In 2000, we acquired a 10% interest in Apacer for approximately $9.9 million in
cash.  Apacer, a privately held Taiwanese company and a related entity of Acer,
is a memory module manufacturer. Bing Yeh our President, CEO and Board Director
also is a member of Apacer's board. In 2001, we invested an additional $2.1
million in Apacer.  In August 2002, we made an additional investment of
$181,000.  The investment was written down to $4.4 million during 2002, refer to
Note 10 of the Notes to the Consolidated Financial Statements.  At December 31,
2002, our investment represented approximately 10% of the outstanding equity of
Apacer.  Our sales to the related Acer entities were made at prevailing market
prices and the payment terms are consistent with the payment terms extended to
our other customers.  Our purchases from Apacer are made pursuant to purchase
orders at prevailing market prices. We do not have a long-term contract with
Apacer to supply us with products. If Apacer were to terminate its relationship
with us, we believe that we would be able to procure the necessary products from
other production subcontractors. We are not obligated to provide Apacer with any
additional financing.

In 2000, we acquired a 15% interest in PCT, a privately held Taiwanese
company, for approximately $1.5 million in cash. Bing Yeh our President, CEO and
Board Director is also a member of PCT's board. PCT is one of our stocking
representatives.  In May 2002, we made an additional investment of $179,000 in
PCT.

PCT earns commissions for point-of-sales transactions to its customers. PCT's
commissions are paid at the same rate as all of our other stocking
representatives in Asia.  In 2000, 2001 and 2002 we paid sales commissions of
approximately $2.0 million, $1.7 million and $2.3 million, respectively, to PCT.

In March 2001, PCT established a separate company and wholly-owned
subsidiary, SPT, to provide planning, warehousing, delivery, billing, collection
and other logistic functions for us in Taiwan.  SPT now services substantially
all of our end customers based in Taiwan, China and other Southeast Asia
countries. Product shipped to SPT is accounted for as consigned inventory and
revenue is recognized when the products have been delivered and are considered
as a sale to our end customers by SPT. We pay SPT a fee based on a percentage of revenue for each

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In 2000, we acquired a 1% interest in KYE, a publicly held Taiwanese company,
which is a production subcontractor, for approximately $4.6 million in cash. The
investment was made in KYE in order to strengthen the relationship between us
and KYE. During 2001, KYE completed an initial public offering on the Taiwan
Stock Exchange.  Accordingly, the investment has been included in long-term
available-for-sale investments in the balance sheet as of December 31, 2001 and
2002. The investment was written down to $1.3 million during 2001 and is valued
at $1.4 million as of December 31, 2002 based on the quoted market price as of
the balance sheet date.  Our purchases from KYE are made pursuant to purchase
orders at prevailing market prices. We do not have a long-term contract with KYE
to supply us with services.  If KYE were to terminate its relationship with us
we believe that we would be able to procure the necessary services from other
production subcontractors. We are not obligated to provide KYE with any
additional financing.

In 2000, we acquired a 3% interest in PTI, a privately held Taiwanese
company, which is a production subcontractor, for approximately $2.5 million in
cash. The investment is carried at cost. The investment was made in PTI in order
to strengthen the relationship between us and PTI.  Our purchases from PTI are
made pursuant to purchase orders at prevailing market prices. We do not have a
long-term contract with PTI to supply us with services. If PTI were to terminate
its relationship with us we believe that we would be able to procure the
necessary services from other production subcontractors.  We are not obligated
to provide PTI with any additional financing.

In 2001, we acquired a 9% interest in GSMC, a privately held Cayman Islands
company with operations in China, which is a wafer foundry under construction,
for approximately $50.0 million in cash. Bing Yeh our President, CEO and Board
Director also is a member of GSMC's board. This investment is carried at cost.
We anticipate that GSMC will begin to manufacture some of our products during
2003. We do not have a long-term contract with GSMC to supply us with products.
We are not obligated to provide GSMC with any additional financing.

Mr. Yasushi Chikagami, a member of our board of directors, is also a member
of the board of directors of Ocean Automation Ltd. Ocean Automation Ltd. and
certain of its affiliates, such as Ocean Contract Manufacturing Ltd, are our
customers.  Our sales to the Ocean entities were made at prevailing market
prices and the payment terms are consistent with the payment terms extended to
our other customers.



Critical Accounting Estimates

Our critical accounting estimates are as follows:

- Revenue recognition;
- Allowance for sales returns;
- Allowance for doubtful accounts;
- Allowance for excess and obsolete inventory and lower of
cost or market;
- Warranty accrual;
- Litigation costs;
- Valuation of equity investments; and
- Accounting for income taxes.

Revenue recognition. Sales to direct customers and foreign stocking
representatives are recognized net of an allowance for estimated returns. When
product is shipped to direct customers or stocking representatives, or by our
distributors or SPT to end users, prior to recognizing revenue, we also require
that evidence of the arrangement exists, the price is fixed or determinable and
collection is reasonably assured. Our shipping terms are generally FOB shipping

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Most of our technology licenses provide for the payment of up-front license
fees and continuing royalties based on product sales. For license and other
arrangements for technology that we are continuing to enhance and refine and
under which we are obligated to provide unspecified enhancements, revenue is
recognized over the lesser of the estimated period that we have historically
enhanced and developed refinements to the technology, approximately two to three
years (the upgrade period), or the remaining portion of the upgrade period from
the date of delivery, provided all specified technology and documentation has
been delivered, the fee is fixed or determinable and collection of the fee is
reasonably assured. From time to time, we reexamine the estimated upgrade period
relating to licensed technology to determine if a change in the estimated
upgrade period is needed. Revenue from license or other technology arrangements
where we are not continuing to enhance and refine technology or are not
obligated to provide unspecified enhancements is recognized upon delivery, if
the fee is fixed or determinable and collection of the fee is reasonably
assured.

Royalties received under these arrangements during the upgrade period are
recognized as revenue based on the ratio of the elapsed portion of the upgrade
period to the estimated upgrade period. The remaining portions of the royalties
are recognized ratably over the remaining portion of the upgrade period.
Royalties received after the upgrade period has elapsed are recognized when
reported to us, which generally coincides with the receipt of payment.

If we make different judgments or utilize different estimates in relation to
the estimated period of technology enhancement and development, the amount and
timing of our license and royalty revenues could be materially different.

Allowance for sales returns. We maintain allowances for sales returns
for estimated product returns by our customers. We estimate our allowance for
sales returns based on our historical return experience, current economic
trends, changes in customer demand, known returns we have not received and other
assumptions.  The allowance for sales returns was $8.2 million, $4.5 million and
$1.8 million as of December 31, 2000, 2001 and 2002, respectively.  If we make
different judgments or utilize different estimates, the amount and timing of our
revenue could be materially different.

Allowance for doubtful accounts. We maintain allowance for doubtful
accounts for estimated losses from the inability of our customers to make
required payments. We evaluate our allowance for doubtful accounts based on the
aging of our accounts receivable, the financial condition of our customers and
their payment history, our historical write-off experience and other
assumptions.  If we were to make different judgments of the financial condition
of our customers or the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.  The allowance for doubtful accounts was
$783,000, $2.8 million and $4.4 million as of December 31, 2000, 2001 and 2002,
respectively.

Allowance for excess and obsolete inventory and lower of cost or
market. Our inventories are stated at the lower of cost (determined on a
first-in, first-out basis) or market value. We typically plan our production and
inventory levels based on internal forecasts of customer demand, which are
highly unpredictable and can fluctuate substantially. The value of our inventory
is dependent on our estimate of future average selling prices, and, if our
projected average selling prices are over estimated, we may be required to
adjust our inventory value to reflect the lower of cost or market. Our
inventories include high technology parts and components that are specialized in
nature or subject to rapid technological obsolescence.  We maintain allowance
for inventory for potentially excess and obsolete inventories and those
inventories carried at costs that are higher than their market values.  Some of
our customers have requested that we ship them product that has a finished goods
date of manufacture that is less than one year old.  In the event that this
becomes a common requirement, it may be necessary for us to provide for an
additional allowance for our on hand finished goods inventory with a date of
manufacture of greater than one year old, which could result in additional
inventory write-downs.  Our allowance for excess and
obsolete inventories includes an allowance for our on hand finished goods
inventory with a date of manufacture of greater than two years old and for
certain products with a date of manufacture of greater than one year old.
If we determine that market conditions are less favorable
than those projected by management, such as an unanticipated decline in average

23

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Warranty accrual. Our products are generally subject to warranty and
we provide for the estimated future costs of repair, replacement or customer
accommodation upon shipment of the product in the accompanying statements of
operations. Our warranty accrual is estimated based on historical claims
compared to historical revenues and assumes that we have to replace products
subject to a claim. For new products, we use our historical percentage for the
appropriate class of product. Should actual product failure rates differ from
our estimates, revisions to the estimated warranty liability would be required.

Litigation costs. From time to time, we are also involved in other
legal actions arising in the ordinary course of business. We have incurred
certain costs associated with defending these matters.  There can be no assurance
the Atmel complaint or other third party assertions will be resolved without
costly litigation, in a manner that is not adverse to our financial position,
results of operations or cash flows or without requiring royalty payments in the
future which may adversely impact gross margins. As of December 31, 2002, no
estimate can be made of the possible loss or possible range of loss associated
with the resolution of these contingencies.  If additional information becomes
available such that we estimate that there is a possible loss or possible range
of loss associated with these contingencies, then we would record the minimum
estimated liability, which could materially impact our results of operations and
financial position.

Valuation of equity investments. We hold minority interests in
companies having operations in the semiconductor industry. We record an
investment impairment charge when we believe an investment has experienced a
decline in value that is other than temporary. Future adverse changes in market
conditions or poor operating results of underlying investments could result in
losses or an inability to recover the carrying value of the investments, thereby
possibly requiring an impairment charge in the future. The recorded value of our
equity investments at December 31, 2002 is $60.9 million.

Accounting for income taxes.  If appropriate, we record a valuation
allowance to reduce our deferred tax assets to the amount that is more likely
than not to be realized. While we have considered future taxable income and
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event we were to determine that we would be
unable to realize all or part of our deferred tax assets in the future, an
adjustment to the deferred tax asset would be a charge to income in the period
such determination was made.  We have not provided any valuation allowance
against our deferred tax assets as of December 31, 2000, 2001 or 2002 as we
believe it is more likely than not that such assets will be realized.

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and
Other Intangible Assets," which is effective for fiscal years beginning after
December 15, 2001.  SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the testing for impairment of existing goodwill and other
intangibles.  We adopted SFAS No. 142 during the quarter ended March 31, 2002.
The adoption of SFAS No. 142 did not have a significant impact on our financial
position or results of operations and goodwill amortization recorded in prior
periods was not material.

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs.  SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We are currently assessing the impact of SFAS No. 143 on
our consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of."  SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Division of a Business,

24

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In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities."  SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under Emerging Issues Task Force, or EITF, No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."  The scope of
SFAS No. 146 also includes costs related to terminating a contract that is
not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002 and early
application is encouraged.  We will adopt SFAS No. 146 during the quarter
ending March 31, 2003.  The provisions of EITF No. 94-3 shall continue to apply
for an exit activity initiated under an exit plan that met the criteria of EITF
No. 94-3 prior to the adoption of SFAS No. 146.  The effect of adoption of SFAS
No. 146 will change on a prospective basis the timing of when restructuring
charges are recorded from a commitment date approach to when the liability is
incurred.

In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee.  In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities.  The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end.  The disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002.  We have adopted the disclosure provision of FIN No. 45 for the year ended
December 31, 2002 and we are currently assessing the impact of the recognition
and measurement provisions of FIN No. 45 on our consolidated financial
statements.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are currently assessing the impact of EITF Issue No. 00-21 on our consolidated
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123."  SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation.  SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002.  We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations.  Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of our stock at the date of the grant over the amount an employee must pay to
acquire our stock.  We have adopted the annual disclosure provisions of SFAS No.
148 in our financial reports for the year ended December 31, 2002 and will adopt
the interim disclosure provisions for our financial reports for the quarter
ending March 31, 2003. As the adoption of this standard involves disclosures
only, we do not expect a material impact on our consolidated financial
statements.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable

25

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Liquidity and Capital Resources

Operating activities.  Cash provided by operations was $23.4
million in 2002 and relates primarily to non-cash adjustments of $42.4 million,
including depreciation and amortization of $9.8 million, provision for doubtful
accounts of $3.0 million, provision for sales returns of $2.8 million,
inventory valuation adjustments of $10.4 million, changes in deferred income
taxes of $7.0 million, impairment of equity investments of $7.8 million and tax
benefit from employee stock plans of $1.5 million.  Further, cash provided from
operations relates to decreases in accounts receivable from unrelated parties of
$3.3 million and inventories of $16.0 million and increases in accounts payable
to unrelated parties of $4.3 million and accrued expenses and other liabilities
of $1.6 million.  In 2002, cash provided from operating activities was reduced
by increases in accounts receivable from related parties of $4.5 million and
other current and non-current assets of $21.3 million and decreases in accounts
payable to related parties of $564,000 and deferred revenue of $2.8 million.
Our operating activities used cash of $22.5 million in 2001 primarily due to net
loss of $29.0 million, increases in trade accounts receivable from related parties
of $4.0 million and inventory of $108.9 million, and decreases in trade accounts
payable from related and unrelated parties of $15.2 million, accrued expenses of
$17.2 million and deferred revenue of $9.8 million. Cash used in operating
activities was reduced by decreases in trade accounts receivable from unrelated
parties of $55.1 million, other current and non-current assets of $3.4 million,
and non-cash adjustments of $103.0 million, primarily relating to our provision
for sales returns of $32.2 million, inventory valuation adjustments of $73.9
million, depreciation and amortization of $9.8 million, our provision for
doubtful accounts receivable of $2.3 million, impairment of equity investment of
$1.3 million and other operating expenses of $3.3 million, offset by $19.9
million from the change in deferred income taxes. The decrease in trade accounts
receivable from unrelated parties relates to decreased shipment volume and
decreased average selling prices. The increase in trade accounts receivable from
related parties relates to SPT, our logistics center in Taiwan.

Investing activities.  Cash used in investing activities was $17.0
million during 2002. Investing activities in 2002 were primarily related to
capital expenditures of approximately $4.3 million and net purchases of
available-for-sale investments and restricted cash of $11.1 million.  In
addition, during 2002 we invested $964,000 in Insyde Software Corporation, a
Taiwanese company that completed an initial public offering on the Taiwan Stock
Exchange in January 2003, made additional investments of $179,000 in PCT and
$181,000 in Apacer and $333,000 in another investment.  Our investing activities
provided cash of approximately $2.1 million during 2001, primarily due to a
total of $68.4 million cash from the excess sales and maturities of
available-for-sale investments over the purchases of such investments, offset by $52.2
million used to acquire equity investments, of which $50.0 million was invested
in GSMC. GSMC is a Cayman Islands company with wafer foundry operations under
construction in China. Further, we invested approximately $13.7 million in
capital expenditures and used approximately $498,000 of cash for the final
payment of our Agate acquisition.  We plan to continue to invest in capital
equipment to be used primarily for test equipment and design engineering tools
for research and development, information systems infrastructure, and leasehold
improvements.

Financing activities. Our financing activities provided cash of
approximately $3.8 million in 2002 and $5.0 million in 2001. During 2002, the
cash provided was primarily from $4.1 million of common stock issued under our
employee stock purchase plan and the exercise of employee stock options, offset
by $316,000 in loan repayments.  During 2001, cash provided was from $3.7
million of common stock issued under our employee stock purchase plan and the
exercise of employee stock options and $1.8 million related to a loan from a
landlord, offset by $491,000 in loan repayments and other financing activities.
We terminated our line of credit on July 12, 2002.

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Principal sources of liquidity at December 31, 2002 consisted of $150.9
million of cash, cash equivalents, and short-term and long-term available-for-sale
investments.  In July 2002, we posted a bond in the amount of $36.5 million
for the Atmel litigation.  In connection with the bond, we have pledged cash,
cash equivalents and available-for-sale investments in the amount of $36.5
million.  As of December 31, 2002, this amount is included in restricted cash,
cash equivalents and available-for-sale investments in our balance sheet.

Purchase Commitments. As of December 31, 2002, we had outstanding
purchase commitments with our foundry vendors of approximately $21.1 million for
delivery in 2003.  We have recorded a liability of $1.3 million for adverse
purchase commitments.

In December 2000, we committed, subject to certain business conditions, to
prepay $50.0 million to a vendor to secure increased wafer capacity in 2002 and
2003. We renegotiated this agreement in December 2002 and were released from our
commitment.

Lease Commitments. We have long-term, non-cancelable building lease
commitments. We are currently seeking subtenants for our unused office space.
During the third quarter of 2001, we recorded a period charge to other operating
expense of approximately $756,000 relating to an operating lease for an
abandoned building. This charge represents the estimated difference between the
total non-discounted future sublease income and our non-discounted lease
commitments relating to this building. The charge was an estimate and may be
adjusted if we obtain a sublease for the building and the actual sublease income
is significantly different from the estimate. We may be unable to secure
subtenants for such space due to the recent decrease in demand for commercial
rental space in Silicon Valley.  If we are not successful in subleasing our
unused office space, we may be required to take an additional period charge for
the balance of the future lease cost.  At December 31, 2001 and 2002, payments
made have reduced the recorded liability to $662,000 and $473,000 respectively.
See also "Business Risks - If we are not successful in subleasing our unused
office space, we may be required to take a period charge for the difference
between the total future sublease income and our lease cost."

Future payments due under building lease, purchase commitments and other
contractual obligations as of December 31, 2002 (in thousands):

`Less than                          More than
Contractual obligations                         Total      1 year    1-3 years  3-5 years    5 years
--------------------------------------------  ---------  ----------  ---------  ----------  ---------
Notes payable............................... $   1,223  $      352  $     832  $       39  $      --
Operating leases............................    25,145       5,162      8,869       5,007      6,107
Purchase commitments........................    21,064      21,064         --          --         --
Other long-term liability...................     1,002          --        402         181        419
                                              ---------  ----------  ---------  ----------  ---------
Total....................................... $  48,434  $   26,578  $  10,103  $    5,227  $   6,526
                                              =========  ==========  =========  ==========  =========`

Stock Purchase Plan. In September 2001, our board of directors
authorized the purchase of an aggregate of up to $15.0 million of our common
stock. The purchases may be made in the open market at prevailing market prices
or in negotiated transactions off the market, subject to compliance with
applicable provisions of the California Corporation Code and in accordance with
applicable federal and state securities laws and regulations. The stock purchase
program was recently extended until October 31, 2003 and will stay in effect
unless earlier revoked by our board of directors. As of December 31, 2002, no
shares had been purchased under this program.

Operating Capital Requirements.  We believe that our cash balances,
together with funds we expect to generate from operations, will be sufficient to
meet our projected working capital and other cash requirements through at least
the next twelve months. However, there can be no assurance that future events
will not require us to seek additional borrowings or capital and, if so
required, that such borrowing or capital will be available on acceptable terms.
Factors that could affect our short-term and long-term cash used or generated
from operations and as a result, our need to seek additional borrowings or
capital include:

- the average selling prices of our products;
- customer demand for our products;
- the need to secure future wafer production capacity from
our suppliers;
- the timing of significant orders and of license and
royalty revenue; and
- unanticipated research and development expenses
associated with new product introductions.

Please also see "Business Risks - Our operating results fluctuate
significantly, and an unanticipated decline in revenues may disappoint
securities analysts or investors and result in a decline in our stock
price."

In addition, on May 7, 2002, the court entered judgment against us in Atmel's
lawsuit against us in the total amount of $36.5 million.  In the event our
appeal of this lawsuit is unsuccessful, we may have to pay this amount to Atmel.
For more information, please also see "Business Risks - If we are accused
of infringing the intellectual property rights of other parties we may become
subject to time-consuming and costly litigation.  If we lose, we could suffer a
significant impact on our business and be forced to pay damages."

From time to time, we are also involved in other legal actions arising in the
ordinary course of business.  We have accrued certain costs associated with
defending these matters.  There can be no assurance the Atmel complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to our financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.  As a
result, no losses have been accrued in our financial statements as of December
31, 2002.

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Business Risks

Risks Related to Our Business

Our operating results fluctuate significantly, and an unanticipated decline
in revenues may disappoint securities analysts or investors and result in a
decline in our stock price.

Although we were profitable in 2000, we incurred net losses for 2001 and
2002, and in fiscal 1998 and 1999. Our operating results have fluctuated
significantly and our past financial performance should not be used to predict
future operating results. Our recent quarterly and annual operating results have
fluctuated, and may continue to fluctuate, due to the following factors, all of
which are difficult to forecast and many of which are out of our control:

- the availability, timely delivery and cost of wafers or other manufacturing
and assembly services from our suppliers;
- competitive pricing pressures and related changes in selling prices;
- fluctuations in manufacturing yields and significant yield losses;
- new product announcements and introductions of competing products by us or
our competitors;
- product obsolescence;
- lower of cost or market, obsolescence or other inventory adjustments;
- changes in demand for, or in the mix of, our products;
- the gain or loss of significant customers;
- market acceptance of products utilizing our SuperFlashâtechnology;
- changes in the channels through which our products are distributed and the
timeliness of receipt of distributor resale information;
- exchange rate fluctuations;
- general economic, political and environmental-related conditions, such as
natural disasters;
- increases in allowance for doubtful accounts;
- valuation allowances on deferred tax assets based on changes in estimated
future taxable income;
- difficulties in forecasting, planning and management of inventory levels;
- unanticipated research and development expenses associated with new product
introductions; and
- the timing of significant orders and of license and royalty revenue.

As recent experience confirms, a downturn in the market for products such as
personal computers and cellular telephones that incorporate our products can
also harm our operating results.

Our operating expenses are relatively fixed, and we order materials in
advance of anticipated customer demand. Therefore, we have limited ability to
reduce expenses quickly in response to any revenue shortfalls.

Our operating expenses are relatively fixed, and we therefore have
limited ability to reduce expenses quickly in response to any revenue
shortfalls. Consequently, our operating results will be harmed if our revenues
do not meet our projections. We may experience revenue shortfalls for the
following reasons:

- sudden drops in consumer demand which may cause customers to cancel backlog,
push out shipment schedules, or reduce new orders, possibly due to a slowing
economy or inventory corrections among our customers;
- significant declines in selling prices that occur because of competitive
price pressure during an over-supply market environment;
- sudden shortages of raw materials for fabrication, test or assembly capacity
constraints that lead our suppliers to allocate available supplies or capacity
to other customers which, in turn, harm our ability to meet our sales
obligations; and
- the reduction, rescheduling or cancellation of customer orders.

In addition, political or economic events beyond our control
can suddenly result in increased operating costs.  For example, the terrorist
attacks of September 11, 2001 have resulted in a substantial increase to our

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We incurred significant inventory valuation adjustments in 2001 and 2002
and we may incur additional significant inventory valuation adjustments in the
future.

We typically plan our production and inventory levels based on internal
forecasts of customer demand, which are highly unpredictable and can fluctuate
substantially. The value of our inventory is dependent on our estimate of future
average selling prices, and, if our projected average selling prices are over
estimated, we may be required to adjust our inventory value to reflect the lower
of cost or market. As of December 31, 2002, we had $83.0 million of inventory on
hand, a decrease of $25.2 million, or 23.3%, from December 31, 2001. Total
valuation adjustments to inventory were $4.3 million in 2000, $72.2 million in
2001 and $9.2 million in 2002. Due to the large number of units in our
inventory, even a small change in average selling prices could result in a
significant adjustment and could harm our financial results.  Some of our
customers have requested that we ship them product that has a finished goods
date of manufacture that is less than one year old. As of December 31, 2002, our
allowance for excess and obsolete inventories includes an allowance for our on
hand finished goods inventory with a date of manufacture of greater than two
years old and for certain products with a date of manufacture of greater than
one year old.  In the event that this becomes a common requirement, it may be
necessary for us to provide for an additional allowance for our on hand finished
goods inventory with a date of manufacture of greater than one year old, which
could result in a significant adjustment and could harm our financial results.

Cancellations or rescheduling of backlog may result in lower future
revenue and harm our business.

Due to possible customer changes in delivery schedules and cancellations
of orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period.  A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business.  We began to experience a sharp downturn in several of
our markets late in the fourth quarter of 2000, as our customers reacted to
weakening demand for their products.  Although we had improvements in total
units shipped in 2002 compared to 2001, our revenues declined in 2002 due to
decreased average selling prices.  Our business could be harmed by industry-wide
fluctuations in the future.

Our business may suffer due to risks associated with international sales
and operations.

During 2000, 2001 and 2002, our export product and licensing revenues
accounted for approximately 84.3%, 90.3% and 92.0% of our net revenues,
respectively.  Our international business activities are subject to a number of
risks, each of which could impose unexpected costs on us that would harm our
operating results. These risks include:

- difficulties in complying with regulatory requirements and standards;
- tariffs and other trade barriers;
- costs and risks of localizing products for foreign countries;
- reliance on third parties to distribute our products;
- extended accounts receivable payment cycles;
- potentially adverse tax consequences;
- limits on repatriation of earnings; and
- burdens of complying with a wide variety of foreign laws.

In addition, we have made equity investments in companies with operations in
China, Japan and Taiwan. The value of our investments is subject to the economic
and political conditions particular to their industry, their countries and to
the global economy. If we determine that a change in the recorded value of an
investment is other than temporary, we will adjust the value of the investment.
Such an expense could have a negative impact on our operating results.  During
2002 we determined that a decline in the value of our investment in Apacer was
other than temporary and we wrote down the value of our investment by $7.8
million.

We derived 77.6%, 80.7% and 88.5% of our net product revenues from Asia
during 2000, 2001 and 2002, respectively.  Additionally, substantially all of
our wafer suppliers and packaging and testing subcontractors are located in
Asia.  Any kind of economic, political or environmental instability in this

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It should also be noted that we are greatly impacted by the political,
economic and military conditions in Taiwan. Taiwan and China are continuously
engaged in political disputes and both countries have continued to conduct
military exercises in or near the other's territorial waters and airspace.  Such
disputes may continue and even escalate, resulting in an economic embargo, a
disruption in shipping or even military hostilities.  Any of these events could
delay production or shipment of our products.  Any kind of activity of this
nature or even rumors of such activity could harm our operations, revenues,
operating results, and stock price.

Terrorist attacks and threats, and government responses thereto, could
harm our business.

Terrorist attacks in the United States or abroad against American
interests or citizens, U.S. retaliation for these attacks, threats of additional
terrorist activity and the potential for war in Iraq has caused our customer
base to become more cautious.  Any escalation in these events or similar future
events may disrupt our operations or those of our customers, distributors and
suppliers, and may affect the availability of materials needed to manufacture
our products or the means to transport those materials to manufacturing
facilities and finished products to customers.  In addition, these events have
had and may continue to have an adverse impact on the U.S. and world economy in
general and consumer spending in particular, which could harm our business.

We do not typically enter into long-term contracts with our customers, and
the loss of a major customer could harm our business.

We do not typically enter into long-term contracts with our customers.
In addition, we cannot be certain as to future order levels from our customers.
In the past, when we have entered into a long-term contract, the contract has
generally been terminable at the convenience of the customer.

We depend on stocking representatives and distributors to generate a
majority of our revenues.

We rely on stocking representatives and distributors to establish and
maintain customer relationships and to sell our products. These stocking
representatives and distributors could discontinue their relationship with us or
discontinue selling our products at any time. The majority of our stocking
representatives are located in Asia.  The loss of our relationship with any
stocking representative or distributor could harm our operating results by
impairing our ability to sell our products to our end customers.

We depend on SPT, our logistics center, to support many of our customers
in Asia.

Since March 2001, we have been increasing our out-sourcing activities for our customer service logistics to
support our customers.  Currently SPT supports our customers in Taiwan, China
and other Southeast Asia countries.  SPT provides planning, warehousing,
delivery, billing, collection and other logistic functions for us in these
regions.  SPT is a wholly-owned subsidiary of one of our stocking
representatives in Taiwan, PCT. For 2001 and 2002, SPT serviced end customer
shipments accounting for 29.7% and 57.4% of our net product revenues recognized.
For further description of our relationships with PCT and SPT, please refer to
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation - Related Party Transactions."

We do not have any long-term contracts with SPT or PCT, and SPT or PCT may
cease providing services to us at any time.  If SPT or PCT were to terminate
their relationship with us we would experience a delay in reestablishing
warehousing, logistics and distribution functions, which could impair our
ability to collect accounts receivable from SPT and may harm our business.

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We depend on a limited number of foreign foundries to manufacture our
products, and these foundries may not be able to satisfy our manufacturing
requirements, which could cause our revenues to decline.

We outsource substantially all of our manufacturing and testing
activities.  We currently buy all of our wafers and sorted die from a limited
number of suppliers.  Substantially all of our products are manufactured by five
foundries, TSMC in Taiwan, Sanyo, Seiko-Epson and Yasu in Japan, and Samsung in
Korea.  We anticipate that these foundries, together with Vanguard in Taiwan
will manufacture the majority of our products in 2003.  In March 2001, we
invested $50.0 million in GSMC, a Cayman Islands company, for a wafer foundry
project located in Shanghai, China.  We anticipate that GSMC will begin to
manufacture some of our products in the second half of 2003.  If these suppliers
fail to satisfy our requirements on a timely basis at competitive prices we
could suffer manufacturing delays, a possible loss of revenues or higher than
anticipated costs of revenues, any of which could harm our operating results.

Our revenues may be impacted by our ability to obtain adequate wafer supplies
from our foundries. The foundries with which we currently have arrangements,
together with any additional foundry at which capacity might be obtained, may
not be willing or able to satisfy all of our manufacturing requirements on a
timely basis at favorable prices. In addition, we have encountered delays in
qualifying new products and in ramping-up new product production and we could
experience these delays in the future. We are also subject to the risks of
service disruptions, raw material shortages and priceincreases by our
foundries. Such disruptions, shortages and price increases could harm our
operating results.

Manufacturing capacity has in the past been difficult to secure and if
capacity constraints arise in the future our revenues may decline.

In order to grow, we need to increase our present manufacturing capacity.
We currently believe that the existing capacity available to us will be
sufficient through 2003.  However, events that we have not foreseen could arise
which would limit our capacity.  Similar to our $50.0 million investment in
GSMC, we may determine that it is necessary to invest substantial capital in
order to secure appropriate production capacity commitments. If we cannot secure
additional manufacturing capacity on acceptable terms, our ability to grow will
be impaired and our operating results will be harmed.

If we are not successful in subleasing our unused office space, we may be
required to take a period charge for the difference between the total future
sublease income and our lease cost.

We have long-term, non-cancelable building lease commitments.  We are
currently in the process of locating subtenants for our unused office space.  We
may be unable to secure subtenants for this space due to the recent decrease in
demand for commercial rental space in Silicon Valley.  During the third quarter
of 2001, we recorded a period charge to other operating expense of approximately
$756,000 relating to an operating lease for an abandoned building.  This charge
represents the estimated difference between the total non-discounted future
sublease income and our non-discounted lease commitments relating to this
building.  The charge was an estimate and may be adjusted if we obtain a
sublease for the building and the actual sublease income is significantly
different from the estimate.  If we are unable to secure subtenants, we may be
required to take additional period charges for the balance of the future lease
cost, and this will harm our operating results.

Our cost of revenues may increase if we are required to purchase
manufacturing capacity in the future.

To obtain additional manufacturing capacity, we may be required to make
deposits, equipment purchases, loans, joint ventures, equity investments or
technology licenses in or with wafer fabrication companies. These transactions
could involve a commitment of substantial amounts of our capital and technology
licenses in return for production capacity. We may be required to seek
additional debt or equity financing if we need substantial capital in order to
secure this capacity and we cannot assure you that we will be able to obtain
such financing.

If our foundries fail to achieve acceptable wafer manufacturing yields, we
will experience higher costs of revenues and reduced product availability.

The fabrication of our products requires wafers to be produced in a
highly controlled and ultra-clean environment. Semiconductor companies that
supply our wafers from time to time have experienced problems achieving
acceptable wafer manufacturing yields. Semiconductor manufacturing yields are a

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If our foundries discontinue the manufacturing processes needed to meet
our demands, or failto upgrade the technologies needed to manufacture
our products, we may face production delays and lower revenues.

Our wafer and product requirements typically represent a small portion of
the total production of the foundries that manufacture our products. As a
result, we are subject to the risk that a foundry will cease production on an
older or lower-volume manufacturing process that it uses to produce our parts.
Additionally, we cannot be certain our foundries will continue to devote
resources to advance the process technologies on which the manufacturing of our
products is based. Each of these events could increase our costs and harm our
ability to deliver our products on time.

Our dependence on third-party subcontractors to assemble and test our
products subjects us to a number of risks, including an inadequate supply of
products and higher costs of materials.

We depend on independent subcontractors to assemble and test our
products. Our reliance on these subcontractors involves the following
significant risks:

- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of strong demand;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to us;
- potential increases in prices due to capacity shortages and other factors;
and
- potential misappropriation of our intellectual property.

These risks may lead to increased costs, delayed product delivery or loss of
competitive advantage, which would harm our profitability and customer
relationships.

Because our flash memory products typically have lengthy sales cycles, we
may experience substantial delays between incurring expenses related to research
and development and the generation of revenues.

Due to the flash memory product cycle we usually require more than nine
months to realize volume shipments after we first contact a customer. We first
work with customers to achieve a design win,which may take three months
or longer. Our customers then complete the design, testing and evaluation
process and begin to ramp up production, a period which typically lasts an
additional six months or longer. As a result, a significant period of time may
elapse between our research and development efforts and our realization of
revenue, if any, from volume purchasing of our products by our customers.

We face intense competition from companies with significantly greater
financial, technical and marketing resources that could harm sales of our
products.

We compete with major domestic and international semiconductor companies,
many of which have substantially greater financial, technical, marketing,
distribution, and other resources than we do. Many of our competitors have their
own facilities for the production of semiconductor memory components and have
recently added significant capacity for such production. Our memory products,
which presently account for substantially all of our revenues, compete
principally against products offered by AMD, Atmel, Intel, Macronix, Sanyo,
STMicroelectronics and Winbond. If we are successful in developing our
high-density products, these products will compete principally with products offered
by AMD, Atmel, Fujitsu, Hitachi, Intel, Mitsubishi, Samsung, SanDisk, Sharp
Electronics, STMicroelectronics and Toshiba, as well as any new entrants to the
market.

In addition, we may in the future experience direct competition from our
foundry partners. We have licensed to our foundry partners the right to
fabricate products based on our technology and circuit design, and to sell such
products worldwide, subject to our receipt of royalty payments.

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Competition may also come from alternative technologies such as FRAM or other
developing technologies.

Our markets are subject to rapid technological change and, therefore, our
success depends on our ability to develop and introduce new products.

The markets for our products are characterized by:

- rapidly changing technologies;
- evolving and competing industry standards;
- changing customer needs;
- frequent new product introductions and enhancements;
- increased integration with other functions; and
- rapid product obsolescence.

To develop new products for our target markets, we must develop, gain access
to and use leading technologies in a cost-effective and timely manner and
continue to expand our technical and design expertise. In addition, we must have
our products designed into our customers' future products and maintain close
working relationships with key customers in order to develop new products that
meet their changing needs.

In addition, products for communications applications are based on
continually evolving industry standards. Our ability to compete will depend on
our ability to identify and ensure compliance with these industry standards. As
a result, we could be required to invest significant time and effort and incur
significant expense to redesign our products and ensure compliance with relevant
standards. We believe that products for these applications will encounter
intense competition and be highly price sensitive. While we are currently
developing and introducing new products for these applications, we cannot assure
you that these products will reach the market on time, will satisfactorily
address customer needs, will be sold in high volume, or will be sold at
profitable margins.

We cannot assure you that we will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or respond effectively to new technological changes or product
announcements by our competitors. In addition, we may not be successful in
developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance. Our pursuit of necessary
technological advances may require substantial time and expense. Failure in any
of these areas could harm our operating results.

Our future success depends in part on the continued service of our key
design engineering, sales, marketing and executive personnel and our ability to
identify, recruit and retain additional personnel.

We are highly dependent on Bing Yeh, our President and Chief Executive
Officer, as well as the other principal members of our management team and
engineering staff. There is intense competition for qualified personnel in the
semiconductor industry, in particular the highly skilled design, applications
and test engineers involved in the development of flash memory technology.
Competition is especially intense in Silicon Valley, where our corporate
headquarters is located. We may not be able to continue to attract and retain
engineers or other qualified personnel necessary for the development of our
business or to replace engineers or other qualified personnel who may leave our
employ in the future. Our anticipated growth is expected to place increased
demands on our resources and will likely require the addition of new management
and engineering personnel and the development of additional expertise by
existing management personnel. The failure to recruit and retain key design
engineers or other technical and management personnel could harm our
business.

Our ability to compete successfully depends, in part, on our ability to
protect our intellectual property rights.

We rely on a combination of patent, trade secrets, copyrights, mask work
rights, nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights. Policing unauthorized use
of our products, however, is difficult, especially in foreign countries.
Litigation may continue to be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, to determine the
validity and scope of the proprietary rights of others, or to defend against
claims of infringement or invalidity. Litigation could result in substantial
costs and diversion of resources and could harm our business, operating results
and financial condition regardless of the outcome of the litigation. We own 55
patents in the United States relating to our products and processes, and have
filed for several more. In addition, we hold several patents in Europe and

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If we are accused of infringing the intellectual property rights of other
parties we may become subject to time-consuming and costly litigation. If we
lose, we could suffer a significant impact on our business and be forced to pay
damages.

Third parties may assert that our products infringe their proprietary
rights, or may assert claims for indemnification resulting from infringement
claims against us. Any such claims may cause us to delay or cancel shipment of
our products or pay damages that could harm our business, financial condition
and results of operations. In addition, irrespective of the validity or the
successful assertion of such claims, we could incur significant costs in
defending against such claims.

In the past we were sued both by Atmel Corporation and Intel Corporation
regarding patent infringement issues and sued Winbond Electronics Corporation
regarding our contractual relationship with them. Significant management time
and financial resources have been devoted to defending these lawsuits.  We
settled with Intel in May 1999, with Winbond in October 2000, and the Atmel
litigation is ongoing.

In addition to the Atmel, Intel and Winbond actions, we receive from time to
time, letters or communications from other companies stating that such companies
have patent rights that involve our products. Since the design of all of our
products is based on SuperFlash technology, any legal finding that the use of
our SuperFlash technology infringes the patent of another company would have a
significantly negative effect on our entire product line and operating results.
Furthermore, if such a finding were made, there can be no assurance that we
could license the other company's technology on commercially reasonable terms or
that we could successfully operate without such technology. Moreover, if we are
found to infringe, we could be required to pay damages to the owner of the
protected technology and could be prohibited from making, using, selling, or
importing into the United States any products that infringe the protected
technology. In addition, the management attention consumed by and legal cost
associated with any litigation could harm our operating results.

Public announcements may hurt our stock price. During the course of
lawsuits there may be public announcements of the results of hearings, motions,
and other interim proceedings or developments in the litigation. If securities
analysts or investors perceive these results to be negative, it could harm the
market price of our stock.

Our litigation may be expensive, may be protracted and confidential
information may be compromised. Whether or not we are successful in our
lawsuit with Atmel, we expect this litigation to continue to consume substantial
amounts of our financial and managerial resources.  On April 8, 2002, a jury
found that we willfully infringed Atmel's '811 and '829 patents, and awarded
Atmel $20.0 million in actual damages.  On May 7, 2002, the court entered
judgment in the total amount of $36.5 million, which includes the original
$20.0 million.  The '811 and '829 patents expired in February 2002.  Therefore,
we are not precluded from selling any of our products.  We believe that there
were significant errors in both the infringement and the damages verdicts, and
filed a Notice of Appeal on July 16, 2002.  On October 7, 2002, we filed our
opening brief in that appeal.  Our final reply brief was filed on January 16,
2003.  Atmel filed its final brief on January 30, 2003.  The Court of Appeals
will likely schedule oral arguments sometime in 2003.  We do not expect a
decision until sometime in mid-to-late 2003.  Atmel has agreed to stay its
enforcement of this judgment pending our appeal.  In July 2002, we posted a bond
in the amount of $36.5 million pending the appeal.   We have incurred certain
costs associated with defending this matter, and at any time Atmel may file
additional claims against us, which could increase the risk, expense and
duration of the litigation.  Further, because of the substantial amount of
discovery required in connection with this type of litigation, there is a risk
that some of our confidential information could be compromised by disclosure.
For more information with respect to our litigation, please also see "Part I,
Item 3- Legal Proceedings."

If an earthquake or other natural disaster strikes our manufacturing
facility or those of our suppliers, we would be unable to manufacture our
products for a substantial amount of time and we would experience lost
revenues.

Our corporate headquarters are located in California near major
earthquake faults. In addition, some of our suppliers are located near fault
lines. In the event of a major earthquake or other natural disaster near our
headquarters, our operations could be harmed. Similarly, a major earthquake or
other natural disaster such as typhoon near one or more of our major suppliers,

35

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Prolonged electrical power outages, energy shortages, or increased costs
of energy could harm our business.

Our design and process research and development facilities and our
corporate offices are located in California, which is susceptible to power
outages and shortages as well as increased energy costs.  To limit this
exposure, all corporate computer systems at our main California facilities are
on battery back-up.  In addition, all of our engineering and back-up
servers and selected corporate servers are on generator back-up.  While
the majority of our production facilities are not located in California, more
extensive power shortages in the state could delay our design and process
research and development as well as increase our operating costs.

Our growth has in the past placed a significant strain on our management
systems and resources and if we fail to manage our growth, our ability to
market, sell our products or develop new products may be harmed.

Our business has in the past experienced rapid growth, which strained our
internal systems, and future growth will require us to continuously develop
sophisticated information management systems in order to manage our business
effectively. We are currently implementing a supply-chain management system and
a vendor electronic data interface system. There is no guarantee that we will be
able to implement these new systems in a timely fashion, that in themselves they
will be adequate to address any growth, or that we will be able to foresee in a
timely manner other infrastructure needs before they arise. Our success depends
on the ability of our executive officers to effectively manage our growth. If we
are unable to manage our growth effectively, our results of operations will be
harmed. If we fail to successfully implement new management information systems,
our business may suffer severe inefficiencies that may harm the results of our
operations.

Risks Related to Our Industry

Our success is dependent on the growth and strength of the flash memory
market.

All of our products, as well as all new products currently under design,
are stand-alone flash memory devices or devices embedded with flash memory. A
memory technology other than SuperFlash may be adopted as an industry standard.
Our competitors are generally in a better financial and marketing position than
we are from which to influence industry acceptance of a particular memory
technology. In particular, a primary source of competition may come from
alternative technologies such as FRAM devices if such technology is
commercialized for higher density applications. To the extent our competitors
are able to promote a technology other than SuperFlash as an industry standard,
our business will be seriously harmed.

The selling prices for our products are extremely volatile and have
historically declined during periods of over capacity or industry downturns.

The semiconductor industry has historically been cyclical, characterized
by periodic changes in business conditions caused by product supply and demand
imbalance.  When the industry experiences downturns, they often occur in
connection with, or in anticipation of, maturing product cycles and declines in
general economic conditions.  These downturns are characterized by weak product
demand, excessive inventory and accelerated declines of average selling prices.
In some cases, downturns, such as the one we have experienced since late 2000,
have lasted for more than a year.  Our business could be further harmed by
industry-wide prolonged downturns in the future.  The flash memory products
portion of the semiconductor industry, from which we derive substantially all of
our revenues suffered from excess capacity in 1996, 1997 and 1998, which
resulted in greater than normal declines in our markets, which unfavorably
impacted our revenues, gross margins and profitability.  While these conditions
improved in 1999 and 2000, deteriorating market conditions at the end of 2000
and continuing through 2002 have resulted in the decline of our selling prices
and harmed our operating results.

There is seasonality in our business and if we fail to continue to
introduce new products this seasonality may become more pronounced.

Sales of our products in the consumer electronics applications market are
subject to seasonality. As a result, sales of these products are impacted by
seasonal purchasing patterns with higher sales generally occuring in the second
half of each year.  In the past we have been able to mitigate such seasonality

36

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Item 7A. Quantitative and Qualitative Disclosures
about Market Risk

We are exposed to risks associated with foreign exchange rate
fluctuations due to our international manufacturing and sales activities. These
exposures may change over time as business practices evolve and could negatively
impact our operating results and financial condition. All of our sales are
denominated in U.S. dollars.  An increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive and
therefore reduce the demand for our products.  Such a decline in the demand
could reduce revenues and/or result in operating losses. In addition, a downturn
in the economies of China, Japan or Taiwan could impair the value of our equity
investments in companies with operations in these countries.  If we consider the
value of these companies to be impaired, we will write off, or expense, some or
all of our investments.  In the fourth quarter of 2001, we wrote down our
investment in KYE by $3.3 million to $1.3 million due to an other than temporary
decline in its market value.  As of December 31, 2002, the recorded value of our
KYE investment was approximately $1.4 million based on the quoted market price
as of the balance sheet date.  In the third quarter of 2002, we wrote down our
investment in Apacer, a privately held memory module manufacturer located in
Taiwan, by $7.8 million due to an other than temporary decline in its value.  As
of December 31, 2002, the recorded value of our Apacer investment was
approximately $4.4 million.  In addition, we have equity
investments in companies with operations in China, Japan, Taiwan and United
States with recorded values at December 31, 2002 of approximately $50.0 million,
$0.9 million, $9.7 million and $0.3 million, respectively.

At any time, fluctuations in interest rates could affect interest earnings on
our cash, cash equivalents and short-term investments, or the fair value of our
investment portfolio. We believe that the effect, if any, of reasonably possible
near term changes in interest rates on our financial position, results of
operations, and cash flows would not be material. Currently, we do not hedge
these interest rate exposures. As of December 31, 2002, the
carrying value of our available-for-sale investments approximated fair value.
The table below presents the carrying value and related weighted average
interest rates for our unrestricted and restricted cash, cash equivalents and
available-for-sale investments as of December 31, 2002 (in thousands):

`Carrying    Interest
                                                                               Value       Rate
                                                                            -----------  ---------
Short-term available-for-sale investments - fixed rate.................... $    66,125        1.9%
Long-term available-for-sale investments (1 to 2 years) - fixed rate......       4,425        1.8%
Cash and cash equivalents - variable rate.................................     115,727        0.7%
                                                                            -----------
                                                                           $   186,277        1.2%
                                                                            ===========`

Item 8. Consolidated Financial Statements and Supplementary Data

The consolidated financial statements, together with the report thereon
of PricewaterhouseCoopers LLP, independent accountants, dated January 17, 2003, except for Note 13,
which is as of January 23, 2003, are included in a separate section of this Report.

Supplementary Data: Selected Consolidated Quarterly Data

The following table presents our unaudited consolidated statements of
operations data for each of the eight quarters in the period ended December 31,
2002.  In our opinion, this information has been presented on the same basis as
the audited consolidated financial statements included in a separate section of
this report, and all necessary adjustments, consisting only of normal recurring
adjustments, have been included in the amounts below to present fairly the
unaudited quarterly results when read in conjunction with the audited
consolidated financial statements and related notes.  The operating results for
any quarter should not be relied upon as necessarily indicative of results for
any future period.  We expect our quarterly operating results to fluctuate in
future periods due to a variety of reasons, including those discussed in
"Business Risks".

37

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`Quarter Ended
                                        ----------------------------------------------
                                        March 31,  June 30,   September 30,December 31,
                                          2002       2002        2002         2002
                                        ---------  ---------  -----------  -----------
                                            (in thousands, except per share data)
Net revenues:
    Product revenues.................. $  66,295  $  61,480  $    59,445  $    56,801
    License revenues..................     8,287      7,997        8,311        6,042
                                        ---------  ---------  -----------  -----------
      Total net revenues.............. $  74,582  $  69,477  $    67,756  $    62,843
Gross profit (loss)................... $  24,080  $  19,242  $    18,356  $     6,734
Income (loss) from operations......... $   1,387  $  (7,050) $    (1,768) $   (13,821)
Net income (loss)..................... $   1,558  $  (4,222) $    (4,768) $    (7,663)
Net income (loss) per share-basic..... $    0.02  $   (0.05) $     (0.05) $     (0.08)
Net income (loss) per share-diluted... $    0.02  $   (0.05) $     (0.05) $     (0.08)


                                                         Quarter Ended
                                        ----------------------------------------------
                                        March 31,  June 30,   September 30,December 31,
                                          2001       2001        2001         2001
                                        ---------  ---------  -----------  -----------
                                            (in thousands, except per share data)
Net revenues:
    Product revenues.................. $  79,929  $  52,897  $    65,163  $    60,629
    License revenues..................     6,369      9,818        9,034       10,191
                                        ---------  ---------  -----------  -----------
      Total net revenues.............. $  86,298  $  62,715  $    74,197  $    70,820
Gross profit (loss)................... $  28,940  $  24,678  $   (18,042) $    10,293
Income (loss) from operations......... $   5,502  $     437  $   (44,032) $   (12,413)
Net income (loss)..................... $   5,444  $   1,127  $   (26,482) $    (9,085)
Net income (loss) per share-basic..... $    0.06  $    0.01  $     (0.29) $     (0.10)
Net income (loss) per share-diluted... $    0.06  $    0.01  $     (0.29) $     (0.10)`

We recorded inventory valuation adjustments of $42.7 million and $17.4 million in the
third and fourth quarter of 2001, respectively.

We recorded impairment of equity investments of $3.3 million and $7.8 million
in the fourth quarter of 2001 and third quarter of 2002, respectively.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

Not applicable.

38

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PART III

Item 10. Directors and Executive Officers of the Registrant

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
captions "Election of Directors," and "Security Ownership of Certain Beneficial
Owners and Management - Compliance with the Reporting Requirement of Section
16(a)," and are incorporated by reference into this report. The information
relating to our executive officers and directors is contained in Part I, Item 1
of this report.

Item 11. Executive Compensation

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
caption "Compensation - Compensation of Officers," and is incorporated by
reference into this report.

Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
captions "Security Ownership of Certain Beneficial Owners and Management" and
"Compensation - Equity Compensation Plan Information," and are incorporated by
reference into this report.

Item 13. Certain Relationships and Related Transactions

The information required by this item will be contained in our definitive
Proxy Statement with respect to our Annual Meeting of Shareholders under the
caption "Certain Transactions," and is incorporated by reference into this
report. Please also see "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Related Party Transactions."

Item 14. Controls and Procedures

Quarterly evaluation of our Disclosure Controls and Internal Controls.
Within the 90 days prior to the date of this Annual Report on Form 10-K, we
evaluated the effectiveness of the design and operation of our "disclosure
controls and procedures" (Disclosure Controls), and our "internal controls and
procedures for financial reporting" (Internal Controls). This evaluation (the
Controls Evaluation) was done under the supervision and with the participation
of management, including our Chief Executive Officer (CEO) and Chief Financial
Officer (CFO). Rules adopted by the Securities and Exchange Commission's (SEC)
require that in this section of the Annual Report we present the conclusions of
the CEO and the CFO about the effectiveness of our Disclosure Controls and
Internal Controls based on and as of the date of the Controls Evaluation.

CEO and CFO Certifications. Appearing immediately following the
Signatures section of this Annual Report there are two separate forms of
"Certifications" of the CEO and the CFO. The first form of Certification is
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certification). This section of the Annual Report which you are
currently reading is the information concerning the Controls Evaluation referred
to in the Section 302 Certifications and this information should be read in
conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.

Disclosure Controls and Internal Controls. Disclosure Controls are
procedures that are designed with the objective of ensuring that information
required to be disclosed in our reports filed under the Securities Exchange Act
of 1934 (Exchange Act), such as this Annual Report, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms. Disclosure Controls are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including
the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure. Internal Controls are procedures which are designed with the
objective of providing reasonable assurance that (1) our transactions are
properly authorized; (2) our assets are safeguarded against unauthorized or
improper use; and (3) our transactions are properly recorded and reported, all

39

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Limitations on the Effectiveness of Controls. Our management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within SST have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people, or by management override of the control. The design of any
system of controls also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions;
over time, control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may deteriorate.
Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.

Scope of the Controls Evaluation. The CEO/CFO evaluation of our
Disclosure Controls and our Internal Controls included a review of the controls'
objectives and design, the controls' implementation by SST and the effect of the
controls on the information generated for use in this Annual Report. In the
course of the Controls Evaluation, we sought to identify data errors, controls
problems or acts of fraud and to confirm that appropriate corrective action,
including process improvements, were being undertaken. This type of evaluation
will be done on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
Report on Form 10-K. Our Internal Financial Controls are also evaluated on an
ongoing basis by other personnel in our Finance organization and in-part by our
independent auditors to the extent they deem necessary to issue an opinion on
our financial statements. The overall goals of these various evaluation
activities are to monitor our Disclosure Controls and our Internal Controls and
to make modifications as necessary; our intent in this regard is that the
Disclosure Controls and the Internal Controls will be maintained as dynamic
systems that change (including with improvements and corrections) as conditions
warrant.

Among other matters, we sought in our evaluation to determine whether there
were any "significant deficiencies" or "material weaknesses" in our Internal
Controls, or whether we had identified any acts of fraud involving personnel who
have a significant role in our Internal Controls. This information was important
both for the Controls Evaluation generally and because items 5 and 6 in the
Section 302 Certifications of the CEO and CFO require that the CEO and CFO
disclose that information to our Board's Audit Committee and to our independent
auditors and to report on related matters in this section of the Annual Report.
In the professional auditing literature, "significant deficiencies" are referred
to as "reportable conditions"; these are control issues that could have a
significant adverse effect on the ability to record, process, summarize and
report financial data in the financial statements. A "material weakness" is
defined in the auditing literature as a particularly serious reportable
condition where the internal control does not reduce to a relatively low level
the risk that misstatements caused by error or fraud may occur in amounts that
would be material in relation to the financial statements and not be detected
within a timely period by employees in the normal course of performing their
assigned functions. We also sought to deal with other controls matters in the
Controls Evaluation, and in each case if a problem was identified, we considered
what revision, improvement and/or correction to make in accord with our on-going
procedures.

In accord with SEC requirements, the CEO and CFO note that, since the date of
the Controls Evaluation to the date of this Annual Report, there have been no
significant changes in Internal Controls or in other factors that could
significantly affect Internal Controls, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Conclusions. Based upon the Controls Evaluation, our CEO and CFO have
concluded that, subject to the limitations noted above, our Disclosure Controls
are effective to ensure that material information relating to SST and our
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented in conformity with
U.S. generally accepted accounting principles.

40

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PART IV

Item 15. Exhibits, Financial Statement Schedule, and Reports
on Form 8-K.

(a) (1) Consolidated Financial Statements. The index to
the consolidated financial statements is found on page 47 of this Report.

(2) Financial Statement
Schedule. Financial statement schedule Number II is included.

(3) Exhibits. See Exhibit Index
in part (c), below.

(b) Reports on Form 8-K. None.

(c) Index to Exhibits.

|Exhibit Number | Description of
Document                                                                                           
|-------------- | ------------------------------------------------------------------------------------------------------------------
|3.1 (1)        | Bylaws of SST.                                                                                                    
|3.2 (2)        | Restated Articles of Incorporation of SST, dated
November 3, 1995.                                                
|3.3 (3)        | Certificate of Amendment of the Restated
Articles of Incorporation of SST, dated June 30, 2000.                   
|3.4 (4)        | Certificate of Designation of Series A Junior
Participating Preferred Stock.                                      
|4.1            | Reference is made to Exhibits 3.1 to 3.4.                                                                         
|4.2 (5)        | Specimen Stock Certificate of SST.                                                                                
|4.3 (6)        | Rights Agreement between SST and American Stock
Transfer and Trust Co., dated May 4, 1999.                        
|4.4 (7)        | Amendment No. 1 to Rights Agreement between SST
and American Stock Transfer and Trust Co., dated October 28, 2000.
|10.1 (8)       | Equity Incentive Plan and related agreements.                                                                     
|10.2 (9)       | Employee Stock Purchase Plan.                                                                                     
|10.3 (10)      | 1995 Non-Employee Director's Stock Option Plan.                                                                   
|10.4 (11)      | Profit Sharing Plan.                                                                                              
|10.5 (12)      | Lease Agreement between SST and Sonora Court
Properties, dated May 4, 1993, as amended.                           
|10.6 (13)      | Lease Agreement between SST and Coast
Properties, dated May 4, 1995, as amended.                                  
|10.8 (14)      | Lease amendment, dated March 4, 1998, between
SST and Sonora Court Properties.                                    
|10.9 (15)      | Lease Amendment, dated March 4, 1998, between
SST and Coast Properties.                                           
|10.11 (16)     | Second Amendment to Lease, dated September 13,
1999, between SST and Coast Properties.                            
|10.12 (17)     | Lease Agreement between SST and Bhupinder S.
Lehga and Rupinder K. Lehga, dated November 15, 1999.                
|10.13 (18)     | Lease Agreement between SST and The Irvine
Company, dated November 22, 1999.                                      
|10.14 (19)     | Sunnyvale Industrials Net Lease Agreement, dated
June 26, 2000.                                                   

41

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|21.1 | Subsidiaries of SST.                                                                                                                                  
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|23.1 | Consent of PricewaterhouseCoopers LLP,
Independent Accountants.                                                                                       
|24.1 | Power of Attorney is contained on
the signature page.                                                                                                 
|99.1 | Certification of President and Chief Executive
Officer Pursuant to Section 906 of Sarbanes-Oxley Act of 2002.                                         
|99.2 | Certification of Vice President Finance &
Administration, Chief Financial Officer and Secretary Pursuant to Section 906 of
Sarbanes-Oxley Act of 2002.

________



1. Filed as Exhibit 3.2 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
2. Filed as Exhibit 3.4 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
3. Filed as Exhibit 3.5 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed on August 7, 2000, and incorporated by reference
herein.
4. Filed as Exhibit 99.3 to our Current Report on Form 8-K filed on May 18,
1999, and incorporated by reference herein.
5. Filed as Exhibit 4.2 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on November 3, 1995, and incorporated by reference
herein.
6. Filed as Exhibit 99.2 to our Current Report on Form 8-K filed on May 18,
1999, and incorporated by reference herein.
7. Filed as Exhibit 3.6 to our Annual Report on Form 10-K for the year ended
December 31, 2000, as amended, filed on March 30, 2001, and incorporated by
reference herein.
8. Filed as amended as Exhibit 99.1 to our Registration Statement on Form S-8,
File No. 333-98135, filed on August 15, 2002, and incorporated by reference
herein.
9. Filed as amended as Exhibit 99.2 to our Registration Statement on Form S-8,
File No. 33-33130, filed on March 23, 2000, and incorporated by reference
herein.
10. Filed as amended as Exhibit 99.2 to our Registration Statement on Form S-8
File No. 33-98135, filed on August 15, 2002, and incorporated by reference
herein.
11. Filed as Exhibit 10.5 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
12. Filed as Exhibit 10.6 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
13. Filed as Exhibit 10.7 to our Registration Statement on Form S-1, as amended,
File No. 33-97802, filed on October 5, 1995, and incorporated by reference
herein.
14. Filed as Exhibit 10.17 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, filed on August 14, 1998, and incorporated by reference
herein.
15. Filed as Exhibit 10.18 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998, filed on August 14, 1998, and incorporated by reference
herein.
16. Filed as Exhibit 10.23 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
17. Filed as Exhibit 10.24 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
18. Filed as Exhibit 10.25 to our Annual Report on Form 10-K for the year ended
December 31, 1999, as amended, filed on February 24, 2000, and incorporated by
reference herein.
19. Filed as Exhibit 10.28 to our Quarterly Report on Form 10-Q for the quarter
ended June 30, 2000, filed on August 7, 2000, and incorporated by reference
herein.

43

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Sunnyvale, County of Santa Clara, State of California, on the 20th day of March,
2003.

| |                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------
| | SILICON STORAGE TECHNOLOGY, INC.
By: /s/ BING YEH 
Bing Yeh
President and Chief Executive Officer
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Bing Yeh and Jeffrey L. Garon, and each
or any one of them, his true and lawful attorney-in-fact and agent, with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this report,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, or their or his substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.

|Signature                               | Title                                                                                                                       | Date          
|--------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------
|/s/ BING YEH
Bing Yeh                   | President, Chief Executive Officer and Director (Principal
Executive Officer)                                               | March 20, 2003
|/s/ JEFFREY L. GARON
Jeffrey L. Garon   | Vice President Finance & Administration, Chief Financial
Officer and Secretary (Principal Financial and Accounting Officer) | March 20, 2003
|/s/ YAW WEN HU
Yaw Wen Hu               | Director                                                                                                                    | March 20, 2003
|/s/ TSUYOSHI TAIRA
Tsuyoshi Taira       | Director                                                                                                                    | March 20, 2003
|/s/ RONALD CHWANG
Ronald Chwang         | Director                                                                                                                    | March 20, 2003
|/s/ YASUSHI CHIKAGAMI
Yasushi Chikagami | Director                                                                                                                    | March 20, 2003

44

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CERTIFICATIONS



Certification of President and Chief Executive Officer
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Bing Yeh, certify that:

1. I have reviewed this annual report on Form 10-K of Silicon Storage
Technology, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

1. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
2. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
3. presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;



1. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

1. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
2. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

1. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 20, 2003

/s/ BING YEH



45

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Certification of Vice President Finance &
Administration, Chief Financial Officer and Secretary
Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

I, Jeffrey L. Garon, certify that:

1. I have reviewed this annual report on Form 10-K of Silicon Storage
Technology, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

1. designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
2. evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
3. presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;



1. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

1. all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
2. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and

1. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 20, 2003

/s/ JEFFREY L. GARON

46

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES 
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Item                                                                            | Page
|------------------------------------------------------------------------------- | ----
|Report of Independent Accountants                                               | 48  
|Consolidated Balance Sheets                                                     | 49  
|Consolidated Statements of Operations                                           | 50  
|Consolidated Statements of Shareholders' Equity
and Comprehensive Income (Loss) | 51  
|Consolidated Statements of Cash Flows                                           | 52  
|Notes to Consolidated Financial Statements                                      | 53  
|Schedule II                                                                     | 75  

47

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
Silicon Storage Technology, Inc.

In our opinion, the consolidated statements listed in the index appearing
under Item 15 (a) (1) on page 41 present fairly, in all material respects, the
financial position of Silicon Storage Technology, Inc. and its subsidiaries at
December 31, 2002 and 2001, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2002 in
conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in
the index appearing under Item 15 (a) (2) on page 41 presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP
San Jose, California
January 17, 2003, except for Note 13,
which is as of January 23, 2003.



48

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                 (in thousands)

`December 31,
                                                                      --------------------
                                                                        2001       2002
                                                                      ---------  ---------
                               ASSETS
Current assets:
    Cash and cash equivalents....................................... $  93,598  $ 103,751
    Short-term available-for-sale investments.......................    71,666     41,252
    Trade accounts receivable-unrelated parties, net of allowance
      for doubtful accounts of $2,814 in 2001 and $4,420 in 2002....    19,874     10,723
    Trade accounts receivable-related parties.......................    20,796     25,248
    Inventories.....................................................   108,224     83,040
    Deferred tax asset..............................................    24,115     17,154
    Other current assets............................................    11,839     29,671
                                                                      ---------  ---------
       Total current assets.........................................   350,112    310,839
Equipment, furniture and fixtures, net..............................    22,006     16,989
Equity investments..................................................    67,007     60,910
Long-term available-for-sale investments............................     1,299      5,862
Restricted cash and cash equivalents................................        --     11,976
Restricted available-for-sale investments...........................        --     24,873
Deferred tax asset..................................................     5,239      5,164
Other assets........................................................     1,097      3,993
                                                                      ---------  ---------
           Total assets............................................. $ 446,760  $ 440,606
                                                                      =========  =========

                            LIABILITIES
Current liabilities:
    Notes payable, current portion.................................. $     316  $     352
    Trade accounts payable-unrelated parties........................    24,098     28,408
    Trade accounts payable-related parties..........................     7,253      6,689
    Accrued expenses and other liabilities..........................    16,390     18,783
    Deferred revenue................................................     5,499      2,650
                                                                      ---------  ---------
       Total current liabilities....................................    53,556     56,882
Other liabilities...................................................     1,793      1,873
                                                                      ---------  ---------
       Total liabilities............................................    55,349     58,755
                                                                      ---------  ---------
Commitments (Note 5) and Contingencies (Note 6).

                        SHAREHOLDERS' EQUITY
Preferred Stock, no par value
    Authorized: 7,000 shares
    Series A Junior Participating Preferred Stock, no par value
    Designated: 450 shares
    Issued and outstanding: none....................................        --         --
Common stock, no par value:
    Authorized: 250,000 shares
    Issued and outstanding: 91,585 shares in 2001
    and 93,295 shares in 2002.......................................   333,989    339,598
Accumulated other comprehensive income..............................       225        151
Retained earnings...................................................    57,197     42,102
                                                                      ---------  ---------
       Total shareholders' equity...................................   391,411    381,851
                                                                      ---------  ---------
           Total liabilities and shareholders' equity............... $ 446,760  $ 440,606
                                                                      =========  =========`

The accompanying notes are an integral part of these consolidated
                             financial statements.

49

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

`Year Ended December 31,
                                                                 -------------------------------
                                                                   2000       2001       2002
                                                                 ---------  ---------  ---------
Net revenues:
    Product revenues - unrelated parties....................... $ 408,708  $ 168,593  $ 100,620
    Product revenues - related parties.........................    66,608     90,025    143,401
    License revenues...........................................    14,945     35,412     30,637
                                                                 ---------  ---------  ---------
         Total net revenues....................................   490,261    294,030    274,658
Cost of revenues...............................................   264,139    248,161    206,246
                                                                 ---------  ---------  ---------
Gross profit...................................................   226,122     45,869     68,412
                                                                 ---------  ---------  ---------
Operating expenses:
    Research and development...................................    41,535     50,380     47,069
    Sales and marketing........................................    27,968     26,794     25,498
    General and administrative.................................    14,966     17,855     17,097
    Other......................................................     3,911      1,346         --
                                                                 ---------  ---------  ---------
         Total operating expenses..............................    88,380     96,375     89,664
                                                                 ---------  ---------  ---------
Income (loss) from operations..................................   137,742    (50,506)   (21,252)
Interest and other income......................................    10,510      7,350      3,197
Interest expense...............................................      (691)      (338)      (214)
Impairment of equity investments...............................        --     (3,274)    (7,757)
                                                                 ---------  ---------  ---------
Income (loss) before provision for (benefit from) income taxes.   147,561    (46,768)   (26,026)
Provision for (benefit from) income taxes......................    41,813    (17,772)   (10,931)
                                                                 ---------  ---------  ---------
         Net income (loss)..................................... $ 105,748  $ (28,996) $ (15,095)
                                                                 =========  =========  =========

Net income (loss) per share - basic............................ $    1.23  $   (0.32) $   (0.16)
                                                                 =========  =========  =========

Net income (loss) per share - diluted.......................... $    1.13  $   (0.32) $   (0.16)
                                                                 =========  =========  =========`

The accompanying notes are an integral part of these consolidated
                             financial statements.

50

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
                                 (in thousands)

`Retained     Accumulated
                                       Common Stock        Earnings        Other
                                   --------------------  (Accumulated  Comprehensive
                                    Shares     Amount      Deficit)        Income        Total
                                   ---------  ---------  ------------  --------------  ---------
Balances, December 31, 1999.......   74,838  $  60,570  $    (19,555) $           --  $  41,015
    Issuance of shares of common
       stock upon secondary
       offering and private
       placement, net of offering
       costs of $1,099............   12,579    253,729            --              --    253,729
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    2,701      3,782            --              --      3,782
    Tax benefit from exercise
       of stock options...........       --     12,229            --              --     12,229
    Net income....................       --         --       105,748              --
    Unrealized gain on
       available for sale
       securities, net of tax.....       --         --            --             132
    Comprehensive income..........       --         --            --              --    105,880
                                   ---------  ---------  ------------  --------------  ---------
Balances, December 31, 2000.......   90,118    330,310        86,193             132    416,635
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    1,467      3,679            --              --      3,679
    Net loss......................       --         --       (28,996)             --
    Unrealized gain on
       available for sale
       securities, net of tax.....       --         --            --              93
    Comprehensive loss............       --         --            --              --    (28,903)
                                   ---------  ---------  ------------  --------------  ---------
Balances, December 31, 2001.......   91,585    333,989        57,197             225    391,411
    Issuance of shares of
       common stock under
       employees' stock
       purchase and
       option plans...............    1,710      4,076            --              --      4,076
    Tax benefit from exercise
       of stock options...........       --      1,533            --              --      1,533
    Net loss......................       --         --       (15,095)             --
    Unrealized loss on
       available for sale
       securities, net of tax.....       --         --            --             (74)
    Comprehensive loss............       --         --            --              --    (15,169)
                                   ---------  ---------  ------------  --------------  ---------
Balances, December 31, 2002.......   93,295  $ 339,598  $     42,102  $          151  $ 381,851
                                   =========  =========  ============  ==============  =========`

The accompanying notes are an integral part of these consolidated
                             financial statements.


51

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

`Year Ended December 31,
                                                                    -------------------------------
                                                                      2000       2001       2002
                                                                    ---------  ---------  ---------
Cash flows from operating activities:
      Net income (loss)........................................... $ 105,748  $ (28,996) $ (15,095)
      Adjustments to reconcile net income (loss) to net cash
         provided by (used in) operating activities:
      Depreciation and amortization...............................     6,218      9,799      9,847
      Provision for doubtful accounts receivable..................       477      2,251      3,046
      Provision for sales returns.................................     8,166     32,227      2,842
      Provision for excess and obsolete inventories, write down
         of inventory to market and adverse purchase commitments..     4,261     73,932     10,441
      (Gain) loss on sale of equipment............................       (62)        72        (92)
      Deferred income taxes.......................................    (8,994)   (19,863)     7,036
      Purchased in-process research and development...............     3,911         --         --
      Other expenses..............................................        --      1,346         --
      Impairment of equity investments............................        --      3,274      7,757
      Tax benefit from employee stock plans.......................    12,229         --      1,533
      Changes in operating assets and liabilities:
           (in 2000, net of effects of acquisitions)
           Trade accounts receivable from unrelated parties.......   (81,616)    55,109      3,263
           Trade accounts receivable from related parties.........   (14,427)    (3,999)    (4,452)
           Inventories............................................   (47,785)  (108,866)    16,024
           Other current and noncurrent assets....................   (11,646)     3,355    (21,269)
           Trade accounts payable to unrelated parties............    19,977    (15,086)     4,310
           Trade accounts payable to related parties..............     7,339        (86)      (564)
           Accrued expenses and other liabilities.................    28,538    (17,226)     1,588
           Deferred revenue.......................................    11,130     (9,775)    (2,849)
                                                                    ---------  ---------  ---------
            Net cash provided by (used in) operating activities...    43,464    (22,532)    23,366
                                                                    ---------  ---------  ---------
Cash flows from investing activities:
      Restricted cash.............................................        --     12,490         --
      Repayment of restricted cash................................        --    (12,490)        --
      Acquisition of equipment, furniture and fixtures............   (10,745)   (13,700)    (4,315)
      Proceeds from sale of equipment.............................        62         75        118
      Purchases of available-for-sale investments and
         restricted cash..........................................  (147,550)  (166,538)   (74,272)
      Sales and maturities of available-for-sale investments......     7,719    234,928     63,156
      Investment in equity securities.............................   (18,429)   (52,211)    (1,660)
      Cash used in acquisition....................................    (4,154)      (498)        --
                                                                    ---------  ---------  ---------
            Net cash provided by (used in) investing activities...  (173,097)     2,056    (16,973)
                                                                    ---------  ---------  ---------
Cash flows from financing activities:
      Borrowings..................................................    39,750      1,800         --
      Repayments..................................................   (59,674)      (261)      (316)
      Issuance of shares of common stock..........................   257,511      3,679      4,076
      Other.......................................................       (91)      (230)        --
                                                                    ---------  ---------  ---------
            Net cash provided by financing activities.............   237,496      4,988      3,760
                                                                    ---------  ---------  ---------
Net increase (decrease) in cash and cash equivalents..............   107,863    (15,488)    10,153
Cash and cash equivalents at beginning of year....................     1,223    109,086     93,598
                                                                    ---------  ---------  ---------
Cash and cash equivalents at end of year.......................... $ 109,086  $  93,598  $ 103,751
                                                                    =========  =========  =========
Supplemental disclosure of cash flow information:
Cash received for interest........................................ $   3,844  $   8,760  $   3,449
Cash paid for interest............................................ $     691  $     356  $     221
Net cash paid for (received from) income taxes.................... $  24,513  $  12,965  $  (3,189)`

The accompanying notes are an integral part of these consolidated
                             financial statements.

52

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SILICON STORAGE TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations and Summary of Significant Accounting Policies:

Nature of Operations:

Silicon Storage Technology, Inc. ("SST" or "us" or "we") supplies
flash memory semiconductor devices for digital consumer, networking, wireless
communications and Internet computing markets. Flash memory is nonvolatile
memory that does not lose data when the power source is removed and is capable
of electronically erasing selected blocks of data. We license our SuperFlash
technology to other companies for non-competing applications. Our products are
used in personal computers, personal computer peripheral devices, consumer
electronics and communications devices. Our products are sold to manufacturers
located primarily in Asia.

Use of Estimates in Preparation of the Financial Statements:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

Risks, Uncertainties and Concentrations:

Our sales are concentrated in the nonvolatile memory class of the
semiconductor memory industry, which is highly competitive and rapidly changing.
Significant technological changes in the industry, changes in customer
requirements, changes in product costs and selling prices, or the emergence of
competitor products with new capabilities or technologies could affect our
operating results adversely. We currently buy all wafers and die, an integral
component of our products, from outside suppliers and we are dependent on third
party subcontractors to assemble and test our products. Failure by these
suppliers to satisfy our requirements on a timely basis at competitive prices
could cause us to suffer manufacturing delays, a possible loss of revenues, or
higher than anticipated costs of revenues any of which could severely adversely
affect operating results.

Since March 2001, we have been increasing our out-sourcing activities for our
end customer service logistics to support our customers.  Currently Silicon
Professional Technology Ltd., or SPT, supports our customers in Taiwan, China
and other Southeast Asia countries.  SPT provides planning, warehousing,
delivery, billing, collection and other logistic functions for us in these
regions.  SPT is a wholly-owned subsidiary of one of our stocking
representatives in Taiwan, Professional Computer Technology Limited, or PCT.
Products shipped to SPT are accounted for as consigned inventory, and revenue is
recognized when the products have been delivered and are considered as a sale to
our end customers by SPT. For the years ended December 31, 2001 and 2002, SPT
serviced end customer sales accounting for 29.7% and 57.4% of our net product
revenues recognized. Further description of our relationships with PCT and SPT
are in Note 13 of these Notes to the Consolidated Financial Statements.

We ship products to, and have accounts receivable from, original equipment
manufacturers, or OEMs, original design manufacturers, or ODMs, contract
electronic manufacturers, or CEMs, stocking representatives, distributors, and
our logistics center. Our stocking representatives, distributors and logistics
center reship our products to our end customers, including OEMs, ODMs, CEMs and
end users.  No stocking representative or distributor serviced more than 10.0%
of our customer sales in 2000, 2001 or 2002. Our stocking representatives and
distributors could discontinue their relationship with us
or discontinue selling our products at any time. The loss of our relationship
with any of our stocking representatives or distributors
could harm our operating results by impairing our ability to sell our products
to our end customers.  Our logistics center, SPT, may cease providing services to us at any time.  If
SPT were to terminate their relationship with us we would experience a delay in reestablishing
warehousing, logistics and distribution functions, which could impair our ability to collect
accounts receivable from SPT and may harm our business.

We derived 77.6%, 80.7% and 88.5% of our net product revenues from Asia
during 2000, 2001 and 2002, respectively. Additionally, substantially all of our
wafer suppliers and packaging and testing subcontractors are located in Asia.
Any kind of economic, political or environmental instability in this region of
the world can have a severe negative impact on our operating results due to the
large concentration of our production and sales activities in this region.

Our revenues may be impacted by our ability to obtain adequate wafer supplies

53

---

We depend on independent subcontractors to assemble and test our products.
Our reliance on these subcontractors involves the following significant
risks:

- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of strong demand;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to us;
- potential increases in prices due to capacity shortages and other factors;
and
- potential misappropriation of our intellectual property.

These risks may lead to increased costs, delayed product delivery or loss of
competitive advantage, which would harm our profitability and customer
relationships.

It should be noted that we may be greatly impacted by the political, economic
and military conditions in Taiwan. Taiwan and China are continuously engaged in
political disputes and both countries continue to conduct military exercises in
or near the other's territorial waters and airspace. Such disputes may continue
and even escalate, resulting in an economic embargo, a disruption in shipping or
even military hostilities. This could severely harm our business by interrupting
or delaying production or shipment of our product. Any kind of activity of this
nature or even rumors of such activity could severely and negatively impact our
operations, revenues, operating results, and stock price.

Our corporate headquarters are located in California near major earthquake
faults. In addition, some of our suppliers are located near fault lines. In the
event of a major earthquake or other natural disaster near our headquarters, our
operations could be harmed. Similarly, a major earthquake or other natural
disaster, such as a typhoon, near one or more of our major suppliers, like the
earthquake in September 1999 or the typhoon in September 2001 that occurred in
Taiwan, could potentially disrupt the operations of those suppliers, which could
then limit the supply of our products and harm our business.

We incurred net losses in 2001 and 2002.  The losses were the result of
declining revenue, declining average selling prices and impairment of
investments.  We anticipate that our existing cash, cash equivalents and
available-for-sale investments will be sufficient to meet our anticipated cash
needs for operations and capital requirements through December 31, 2003.  Our
expectations as to our cash flows, and as to future cash balances, are subject
to a number of assumptions, including demand for product, average selling
prices, product mix, changes in semiconductor industry conditions, competitive
factors and the outcome of current legal matters, many of which are beyond our
control.  If actual results differ from our assumptions we may need to obtain
debt financing or sell additional shares of our equity securities.  There can be
no assurance that the Company will be able to obtain debt or equity financing on
terms acceptable to us or at all.  Our failure to obtain sufficient funds on
acceptable terms when needed could have a material adverse effect on our ability
to achieve our intended business objectives.

Basis of Consolidation:

The consolidated financial statements include the accounts of SST and
our wholly-owned subsidiaries after elimination of inter-company balances and
transactions. The functional currency of SST and its subsidiaries is the United
States dollar.

Foreign Currency Transactions:

Monetary accounts maintained in currencies other than the United
States dollar are re-measured using the foreign exchange rate at the balance
sheet date. Operational accounts and non-monetary balance sheet accounts are
measured and recorded at the rate in effect at the date of the transactions. The
effects of foreign currency re-measurement are reported in current operations.
The effect of foreign currency re-measurement was not significant in fiscal

54

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Financial Instruments:

Cash equivalents are highly liquid investments with original or
remaining maturities of three months or less as of the dates of purchase. Highly
liquid investments included in cash equivalents are classified as available-for-sale
and are carried at cost, which approximates fair value. Cash equivalents
present insignificant risk of changes in value because of interest rate changes.
We maintain substantially all of our cash balances with three major financial
and/or brokerage institutions domiciled in the United States and we have not
experienced any material losses relating to these investment instruments.

Short and long-term investments, which are comprised of federal, state and
municipal government obligations and foreign and public corporate debt
securities, are classified as available-for-sale and carried at fair value,
based on quoted market prices, with the unrealized gains or losses, net of tax,
reported in shareholders' equity as other comprehensive income. The cost of debt
securities is adjusted for amortization of premiums and accretion of discounts
to maturity, both of which are included in interest income. Realized gains and
losses are recorded on the specific identification method.  Realized gains and
losses were not material in 2000, 2001 and 2002.

The carrying amounts reported for cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses are considered to approximate
fair values based upon the short maturities of those financial instruments.  The
fair value of available-for-sale investments is in Note 2 of these Notes to the
Consolidated Financial Statements.

Financial instruments that potentially subject us to concentrations of credit
risks comprise, principally, cash, cash equivalents, investments and trade
accounts receivable. We invest our excess cash in accordance with our investment
policy, which has been approved by our Board of Directors and reviewed
periodically. We perform credit evaluations of new customers and require those
without positive, established histories to pay in advance, upon delivery or
through letters of credit. Otherwise, we do not require collateral of our
customers, and maintain allowances for potential credit losses. As of December
31, 2001 one account, SPT, a related party, refer to Note 13 of these Notes to
the Consolidated Financial Statements, represented 48.8% and another customer,
Actron, represented 21.9% of net accounts receivable.  As of December 31, 2002,
SPT represented 68.5% of our net accounts receivable.

We have acquired interests in Japanese and Taiwanese companies and a Cayman
Islands company operating in China (see Note 13 of these Notes to the
Consolidated Financial Statements). As these companies are privately held, it
was not practicable to estimate the fair value of the investments in the issued
untraded common stock. Investments in privately held companies are included in
"Equity investments" in the balance sheet and are carried at their original cost
and when a decline in value is other than temporary the securities are reduced
to their estimated fair value. An investment in King Yuan Electronics Company,
Limited, or KYE, a Taiwanese company that completed an initial public offering
during 2001, has been included in "Long-term available-for-sale investments,"
and we have recorded the investment at fair market value, with unrealized gains
and losses reported as a separate component of shareholders' equity. If a loss
is other than temporary, it is reported as an "Impairment of equity
investments."  See Note 10 of these Notes to the Consolidated Financial
Statements.  Dividends and other distributions of earnings from the investees,
if any, are included in other income when declared.

Inventories:

Inventories are stated at the lower of cost (determined on a first-
in, first-out basis) or market value. We typically plan our production and
inventory levels based on internal forecasts of customer demand, which are
highly unpredictable and can fluctuate substantially. The value of our inventory
is dependent on our estimate of future average selling prices, and, if our
projected average selling prices are over estimated, we may be required to
adjust our inventory value to reflect the lower of cost or market. Due to the
large number of units in our inventory, even a small change in average selling
prices could result in a significant adjustment and have a significant impact on
our financial position and results of operations. Our inventories include high
technology parts and components that are specialized in nature or subject to
rapid technological obsolescence.  Some of our customers have requested that we
ship them product that has a finished goods date of manufacture that is less
than one year old.  In the event that this becomes a common requirement, it may
be necessary for us to provide for an additional allowance for our on hand
finished goods inventory with a date of manufacture of greater than one year
old, which could result in a significant adjustment and could harm our financial
results.  As of December 31, 2002, our allowance for excess

55

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Inventory valuation adjustment to cost of sales and adverse purchase
commitments amounted to $4.3 million in 2000, $72.2 million in 2001 and $10.4
million in 2002. In 2001 and 2002, $24.5 million and $5.9 million, respectively,
of the adjustment related to lower of cost or market with the balance due to
excess or obsolete inventory.

Equipment, Furniture and Fixtures:

Equipment, furniture and fixtures are stated at cost and depreciated
using the straight-line method over estimated useful lives of three to seven
years (see Note 3 of these Notes to the Consolidated Financial Statements).

Intangible Assets:

Intangible assets include technology acquired in acquisitions and
technology acquired under licensing arrangements. These amounts are included in
other assets and amortized over estimated lives of three to five years.

Long-Lived Assets:

Long-lived assets include equipment, furniture and fixtures,
privately held equity investments and intangible assets. Whenever events or
changes in circumstances indicate that the carrying amounts of long-lived assets
may not be recoverable, we estimate the future cash flows, undiscounted and
without interest charges, expected to result from the use of those assets and
their eventual cash position. If the sum of the expected future cash flows is
less then the carrying amount of those assets, we recognize an impairment loss
based on the excess of the carrying amount over the fair value of the assets.

Revenue Recognition:

Sales to direct customers and foreign stocking representatives are
recognized net of an allowance for estimated returns. When product is shipped to
direct customers or stocking representatives, or by our distributors or SPT to
end users, prior to recognizing revenue, we also require that evidence of the
arrangement exists, the price is fixed or determinable and collection is
reasonably assured. Sales to distributors are made primarily under arrangements
allowing price protection and the right of stock rotation on merchandise unsold.
Because of the uncertainty associated with pricing concessions and future
returns, we defer recognition of such revenues, related costs of revenues and
related gross profit until the merchandise is sold by the distributor. Products
shipped to SPT are accounted for as consigned inventory and revenue is
recognized when the products have been delivered and are considered as a sale to
our end customers by SPT.

For license and other arrangements for technology that we are continuing to
enhance and refine and under which we are obligated to provide unspecified
enhancements, revenue is recognized over the lesser of the estimated period that
we have historically enhanced and developed refinements to the technology,
approximately two to three years (the upgrade period), or the remaining portion
of the upgrade period from the date of delivery, provided all specified
technology and documentation has been delivered, the fee is fixed or
determinable and collection of the fee is reasonably assured. From time to time,
we reexamine the estimated upgrade period relating to licensed technology to
determine if a change in the estimated upgrade period is needed. Revenue from
license or other technology arrangements where we are not continuing to enhance
and refine technology or are not obligated to provide unspecified enhancements
is recognized upon delivery, if the fee is fixed or determinable and collection
of the fee is reasonably assured.

Royalties received under these arrangements during the upgrade period are
recognized as revenue based on the ratio of the elapsed portion of the upgrade
period to the estimated upgrade period. The remaining portions of the royalties
are recognized ratably over the remaining portion of the upgrade period.
Royalties received after the upgrade period has elapsed are recognized when
reported to us, which generally coincides with the receipt of payment.

56

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Research and Development:

Research and development expenses are charged to operations as
incurred.

Income Taxes:

Deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.

Computation of Net Income (Loss) Per Share:

We have computed and presented net income (loss) per share under two
methods, basic and diluted. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding for the period. Diluted net income (loss) per share is computed by
dividing net income (loss) by the sum of the weighted average number of common
shares outstanding and potential common shares (when dilutive).

Stock Compensation:

We account for stock-based compensation using the intrinsic value
method. We calculate the fair value of stock-based compensation and disclose the
pro forma impact of the value on net income (loss) and net income (loss) per
share in Note 7 of these Notes to the Consolidated Financial Statements.

Comprehensive Income (Loss):

Comprehensive income (loss) is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. Comprehensive income (loss) includes
unrealized gains and losses on available-for-sale investments, net of tax. Other
comprehensive gain (loss) is presented in the statement of shareholders' equity
and comprehensive income (loss).

Reclassifications:

Certain amounts in our prior years consolidated financial statements
have been reclassified to conform to the current year presentation.  These
reclassifications have no impact on our previously reported net income (loss).

Recent Accounting Pronouncements:

In July 2001, the Financial Accounting Standards Board, or FASB,
issued Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill
and Other Intangible Assets," which is effective for fiscal years beginning
after December 15, 2001.  SFAS No. 142 requires, among other things, the
discontinuance of goodwill amortization. In addition, the standard includes
provisions upon adoption for the reclassification of certain existing recognized
intangibles as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and the testing for impairment of existing goodwill and other
intangibles.  We adopted SFAS No. 142 during the quarter ended March 31, 2002.
The adoption of SFAS No. 142 did not have a significant impact on our financial
position or results of operations and goodwill amortization recorded in prior
periods was not material.

In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," which addresses accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs.  SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We are currently assessing the impact of SFAS No. 143 on
our consolidated financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of."  SFAS No. 144 applies to all long-lived assets, including
discontinued operations, and consequently amends the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Division of a Business,

57

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In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or Disposal
Activities."  SFAS No. 146 addresses significant issues regarding the
recognition, measurement, and reporting of costs that are associated with exit
and disposal activities, including restructuring activities that are currently
accounted for under Emerging Issues Task Force, or EITF, No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)."  The scope of
SFAS No. 146 also includes costs related to terminating a contract that is
not a capital lease and termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 will be effective for exit or
disposal activities that are initiated after December 31, 2002 and early
application is encouraged.  We will adopt SFAS No. 146 during the quarter
ending March 31, 2003.  The provisions of EITF No. 94-3 shall continue to apply
for an exit activity initiated under an exit plan that met the criteria of EITF
No. 94-3 prior to the adoption of SFAS No. 146.  The effect of adoption of SFAS
No. 146 will change on a prospective basis the timing of when restructuring
charges are recorded from a commitment date approach to when the liability is
incurred.

In November 2002, the FASB issued FASB Interpretation, or FIN, No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN No. 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee.  In addition, FIN No. 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities.  The initial recognition and initial measurement
provisions of FIN No. 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end.  The disclosure requirements of FIN No. 45 are effective for
financial statements of interim or annual periods ending after December 15,
2002.  We have adopted the disclosure provision of FIN No. 45 for the year ended
December 31, 2002 and we are currently assessing the impact of the recognition
and measurement provisions of FIN No. 45 on our consolidated financial
statements.

In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Accounting for Revenue Arrangements with Multiple Deliverables." EITF Issue No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. The provisions of EITF Issue No. 00-21 will apply to revenue
arrangements entered into in fiscal periods beginning after June 15, 2003. We
are currently assessing the impact of EITF Issue No. 00-21 on our consolidated
financial statements.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123."  SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation.  SFAS No. 148 also requires that disclosures of the pro forma
effect of using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular format.
Additionally, SFAS No. 148 requires disclosure of the pro forma effect in
interim financial statements. The transition and annual disclosure requirements
of SFAS No. 148 are effective for fiscal years ended after December 15, 2002.
The interim disclosure requirements are effective for interim periods beginning
after December 15, 2002.  We have chosen to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion No. 25
and related interpretations.  Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of our stock at the date of the grant over the amount an employee must pay to
acquire our stock.  We have adopted the annual disclosure provisions of SFAS No.
148 in our financial reports for the year ended December 31, 2002 and will adopt
the interim disclosure provisions for our financial reports for the quarter
ending March 31, 2003. As the adoption of this standard involves disclosures
only, we do not expect a material impact on our consolidated financial
statements.

58

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In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51."  FIN No. 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties.  FIN No. 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003.  For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN No. 46 must be applied for the first
interim or annual period beginning after June 15, 2003. We are currently
reviewing our equity investments and associated relationships to determine if
they are variable interest entities as defined by FIN No. 46.  It is reasonably
possible that we are the primary beneficiary of or hold a significant variable
interest in a variable interest entity.  The nature, purpose and activities of
the potential variable interest entities is outlined in Note 13 of these Notes to
the Consolidated Financial Statements.  Our maximum exposure to loss as a result
of our involvement with the potential variable interest entities is our
investment in such entities as we are not obligated to provide any additional
financing.

2. Available-for-Sale Investments:

In July 2002, in connection with our Atmel litigation (see Note 6 of
these Notes to the Consolidated Financial Statements), we posted a bond in the
amount of $36.5 million pending our appeal.  In connection with the bond, we
have pledged cash, cash equivalents and available-for-sale investments in the
amount of $36.5 million under the custody of one financial institution, and
classified these amounts as restricted cash, cash equivalents and available-for-sale
investments.  As of December 31, 2002, total restricted cash, cash
equivalents and available-for-sale investments was $36.8 million, which
consisted of the bond amount of $36.5 million and restricted interest earned on
the investments of approximately $348,000.

The fair value of available-for-sale investments, including restricted
available-for-sale investments, as of December 31, 2002 were as follows (in
thousands):

`Amortized  Unrealized     Fair
                                                                   Cost        Gain        Value
                                                                 ---------  -----------  ---------
Corporate bonds and notes...................................... $     359  $        --  $     359
Government bonds and notes.....................................   123,763          107    123,870
Foreign listed equity securities...............................     1,299          138      1,437
                                                                 ---------  -----------  ---------
Total bonds, notes and equity securities....................... $ 125,421  $       245    125,666
                                                                 =========  ===========
Less amounts classified as cash equivalents............................................   (53,679)
                                                                                         ---------
     Total short and long-term available-for-sale investments.......................... $  71,987
                                                                                         =========
Contractual maturity dates for investments in bonds and notes:
     Less than 1 year.................................................................. $  41,252
     Less than 1 year - restricted.....................................................    24,873
     1 to 5 year.......................................................................     4,425
                                                                                         ---------
                                                                                        $  70,550
                                                                                         =========`

The unrealized gain as of December 31, 2002 is recorded in accumulated other
comprehensive income, net of tax of $94,000.

The fair value of available-for-sale investments as of December 31, 2001 were
as follows (in thousands):

59

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`Amortized  Unrealized     Fair
                                                                   Cost        Gain        Value
                                                                 ---------  -----------  ---------
Corporate bonds and notes...................................... $  56,988  $        59  $  57,047
Foreign bonds and notes........................................     5,418           49      5,467
Government bonds and notes.....................................    58,944          255     59,199
Foreign listed equity securities...............................     1,299           --      1,299
                                                                 ---------  -----------  ---------
Total bonds, notes and equity securities....................... $ 122,649  $       363    123,012
                                                                 =========  ===========
Less amounts classified as cash equivalents............................................   (50,047)
                                                                                         ---------
     Total short and long-term available-for-sale investments.......................... $  72,965
                                                                                         =========
Contractual maturity dates for investments in bonds and notes:
     Less than 1 year.................................................................. $  71,666
                                                                                         =========`

The unrealized gain as of December 31, 2001 is recorded in accumulated other
comprehensive income, net of tax of $138,000.

3. Balance Sheet Detail (in thousands):

Inventories comprise:

`December 31,
                                                                 ----------------------
                                                                   2001        2002
                                                                 ---------  -----------
Raw materials.................................................. $  65,518  $    40,036
Work in process................................................     4,971        8,923
Finished goods.................................................    33,968       28,608
Consigned inventory............................................     3,767        5,473
                                                                 ---------  -----------
                                                                $ 108,224  $    83,040
                                                                 =========  ===========`

Other current assets comprise:

`December 31,
                                                                 ----------------------
                                                                   2001        2002
                                                                 ---------  -----------
Refundable income tax.......................................... $      --  $    22,744
Other current assets...........................................    11,839        6,927
                                                                 ---------  -----------
                                                                $  11,839  $    29,671
                                                                 =========  ===========`

Equipment, furniture and fixtures comprise:

`December 31,       Estimated
                                                                 ----------------------   Useful
                                                                   2001        2002        Lives
                                                                 ---------  -----------  ---------
Equipment...................................................... $  14,998  $    15,142   Four years
Design hardware................................................     6,939        7,937   Three years
Software.......................................................     7,334        8,625   Three years
Furniture and fixtures.........................................     9,951       10,490   Seven years
                                                                 ---------  -----------
                                                                   39,222       42,194
Less accumulated depreciation..................................    17,790       25,762
                                                                 ---------  -----------
                                                                   21,432       16,432
Construction in progress.......................................       574          557
                                                                 ---------  -----------
                                                                $  22,006  $    16,989
                                                                 =========  ===========`

Depreciation expense was $5,016,000, $8,436,000 and $9,306,000 for 2000, 2001
and 2002, respectively.  Construction in progress in 2001 and 2002 relates
primarily to our supply chain management system. These costs will be depreciated
over three years beginning during the month that each system is fully
functional. We expect the supply chain management system to be fully functional
by the end of 2003. The estimated useful life of software purchased after

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Accrued liabilities comprise:

`December 31,
                                                                 ----------------------
                                                                   2001        2002
                                                                 ---------  -----------
Accrued compensation and related............................... $   4,372  $     5,070
Accrued income tax payable.....................................       434        6,782
Accrued liabilities-related parties............................       764          473
Accrued warranty...............................................     2,883          492
Other accrued liabilities......................................     7,937        5,966
                                                                 ---------  -----------
                                                                $  16,390  $    18,783
                                                                 =========  ===========`

Accrued warranty:

`Balance at December 31, 2001................................... $   2,883
Accruals for warranties issued during the period...............       460
Settlements made...............................................    (2,851)
                                                                 ---------
Balance at December 31, 2002................................... $     492
                                                                 =========`

Our products are generally subject to warranty and we provide for the
estimated future costs of repair, replacement or customer accommodation upon
shipment of the product in the accompanying statements of operations. Our
warranty accrual is estimated based on historical claims compared to historical
revenues and assumes that we have to replace products subject to a claim. For
new products, we use our historical percentage for the appropriate class of
product.

Our technology license agreements generally include an indemnification clause
that indemnifies the licensee against liability and damages (including legal
defense costs) arising from any claims of patent, copyright, trademark or trade
secret infringement by our proprietary technology.  The terms of these
guarantees approximate the terms of the technology license agreements, which
typically range from five to ten years.  Our current license agreements expire
from 2003 through 2014.  The maximum possible amount of future payments we could
be required to make, if such indemnifications were required on all of these
agreements, is $34.5 million. We have not recorded any liabilities as of
December 31, 2002 related to these indemnities.

4. Line of Credit:

We terminated our line of credit on July 12, 2002.

5. Commitments:

We lease our corporate facilities under non-cancelable operating leases
that expire in 2003 through 2012. The leases require escalating monthly payments
over their terms and, therefore, periodic rent expense is being recognized on a
straight-line basis. Under the terms of the leases, we are responsible for
maintenance costs, including real property taxes, utilities and other costs.
Rent expense was $2,060,000, $5,334,000 and $5,385,000 in 2000, 2001 and 2002,
respectively.

During the third quarter of 2001, we recorded a period charge to other
operating expense of approximately $756,000 relating to an operating lease for
an abandoned building. This charge represented the estimated difference between
the total non-discounted future sublease income and our non-discounted lease
commitments relating to this building. The charge was an estimate and may be
adjusted if we obtain a sublease for the building and the actual sublease income
is significantly different from the estimate. We may be unable to secure
subtenants for such space due to the recent decrease in demand for commercial
rental space in Silicon Valley. If we are not successful in subleasing our
unused office space, we may be required to take an additional period charge for
the balance of the future lease cost.  At December 31, 2001 and 2002, payments
made have reduced the recorded liability to $662,000 and $473,000, respectively.

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Future minimum rental payments at December 31, 2002 are as follows (in
thousands):

`2003........................................................... $   5,162
2004...........................................................     5,245
2005...........................................................     3,624
2006...........................................................     2,467
2007...........................................................     2,540
Thereafter.....................................................     6,107
                                                                 ---------
                                                                $  25,145
                                                                 =========`

Purchase Commitments:

As of December 31, 2002, we had outstanding purchase commitments with
our foundry vendors of approximately $21.1 million for delivery in 2003.  We
have recorded a liability of $1.3 million for adverse purchase commitments.

In December 2000, we committed, subject to certain business conditions, to
prepay $50.0 million to a vendor to secure increased wafer capacity in 2002 and
2003. We renegotiated this agreement in December 2002 and were released from our
commitment.

6. Contingencies:

On January 3, 1996, Atmel Corporation sued us in the U.S. District Court
for the Northern District of California. Atmel's complaint alleged that we
willfully infringe five U.S. patents owned by or exclusively licensed to Atmel.
Atmel later amended its complaint to allege infringement of a sixth patent.
Regarding each of these six patents, Atmel sought a judgment that we infringe
the patent, an injunction prohibiting future infringement, and treble damages,
as well as attorney's fees and expenses.

On two of the six patents, the District Court ruled by summary judgment that
we did not infringe. Two of the other patents were invalidated by another U.S.
District Court in a proceeding to which we were not a party, but this decision
was later reversed by the Federal Circuit Court of Appeals.  As discussed below,
as the result of a ruling in another case, Atmel has withdrawn its allegations
as to another patent ("the '747 patent").  At this point,
three patents remain at issue in Atmel's District Court case against us ("the
'811, '829 and '903 patents").  As all of these patents have expired, Atmel
cannot obtain an injunction against the sale of our products.

On February 17, 1997, Atmel filed an action with the International Trade
Commission, or ITC, against two suppliers of our parts, involving four of the
six patents that Atmel alleged that we infringed in the District Court case
above. We intervened as a party to that investigation.

On October 16, 2000, the ITC found the '903 patent valid and infringed, and
ruled that we could not import into the United States certain products that use
the claimed circuit made by one of our suppliers. The ITC also ruled that we do
not infringe the '811 and '829 patents. We appealed from the Limited Exclusion
Order, and in August 2001 the Court of Appeals for the Federal Circuit issued
an opinion giving its reasons for denying that appeal. The '903 patent and the
ITC's Limited Exclusion Order expired on September 14, 2001.

On January 14, 2002 the court in Atmel Corp. v. Macronix America, Inc.
denied Atmel's motion to correct the '747 patent. We intervened as a party in
the Macronix case for purposes of opposing that motion. As a result of the
Court's decision, Atmel withdrew its claims against us based on the '747 patent.

A jury trial on the '811 and '829 patents began on April 8, 2002.  The jury
found that we willfully infringed those patents, and awarded Atmel $20.0 million
in actual damages.  On May 7, 2002, the Court entered judgment in the total
amount of $36.5 million, which includes the original $20.0 million.  The '811
and '829 patents expired in February 2002.  Therefore, we are not precluded from
selling any of our products.  We believe that there were significant errors in
both the infringement and the damages verdicts, and filed a Notice of Appeal on
July 16, 2002.  On October 7, 2002, we filed our opening brief in that appeal.
Our final reply brief was filed on January 16, 2003.  Atmel filed its final
brief on January 30, 2003. The Court of Appeals will likely schedule oral
arguments sometime in 2003.  We do not expect a decision until sometime in
mid-to-late 2003.  Atmel has agreed to stay its enforcement of this judgment pending
our appeal.  In July 2002, we posted a bond in the amount of $36.5 million
pending the appeal.  In connection with the bond, we have pledged cash, cash
equivalents and available-for-sale investments in the amount of $36.5 million.

62

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Trial on the '903 patent was severed and heard before a jury beginning on
July 29, 2002.  The Court has ruled that we infringed that patent, so the jury
was asked to decide whether the patent is valid and, if so, assess what, if any,
damages are due Atmel.  The jury was unable to unanimously decide whether the
'903 patent is valid, and a mistrial was declared.  The Court denied Atmel's
request to schedule a retrial until the appeals of the verdict regarding the
'811 and '829 patents are decided.

On October 1, 2000, we announced a settlement in our lawsuit with Winbond
Electronics of Taiwan. We filed a lawsuit against Winbond in July 1998 in the
U.S. District Court in San Jose, California pursuant to the termination of our
SuperFlash technology licensing agreement with Winbond. As part of the
settlement, Winbond agreed to a consent judgment and will not contest the
validity and appropriateness of SST's termination of the licensing agreement in
June 1998. This settlement concludes all litigation between us and Winbond. We
received $10.4 million and $20.0 million in license fees during 2000 and 2001,
respectively, as part of this settlement.  No further back royalty payments were
required after 2001 under this legal settlement.

From time to time, we are also involved in other legal actions arising in the
ordinary course of business.  We have accrued certain costs associated with
defending these matters.  There can be no assurance the Atmel complaint or other
third party assertions will be resolved without costly litigation, in a manner
that is not adverse to our financial position, results of operations or cash
flows or without requiring royalty payments in the future which may adversely
impact gross margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.  As a
result, no losses have been accrued in our financial statements as of December
31, 2002.

7. Shareholders' Equity:

Stock Purchase Plan:

In September 2001, our board of directors authorized the purchase of
an aggregate of up to $15.0 million of our common stock. The purchases may be
made in the open market at prevailing market prices or in negotiated
transactions off the market, subject to compliance with applicable provisions of
the California Corporation Code and in accordance with applicable federal and
state securities laws and regulations. The stock purchase program was recently
extended until October 31, 2003 and will stay in effect unless earlier revoked
by our board of directors. As of December 31, 2002, no shares had been purchased
under this program.

Authorized Capital Shares:

Our authorized capital shares consist of 250,000,000 shares of common
stock and 7,000,000 shares of preferred stock. Of the preferred stock, 450,000
shares has been designated as series A junior participating preferred stock. All
of our capital shares have no par value.

Share Purchase Rights Plan:

We have a Share Purchase Rights Plan, adopted in May 1999 and
subsequently amended, in which preferred stock rights were distributed as a
rights dividend at a rate of one right for each share of common stock held as of
the close of business on May 27, 1999. Preferred stock rights will also be
issued with any new issuance of common shares. Each Right entitles the
registered holder under certain circumstances to purchase from us one
three-hundredth (one-third of one one-hundredth) of a share of series A junior
participating preferred stock. Until the occurrence of certain events the
preferred stock rights will be transferable with and only with the Common
Shares. The effect will be to discourage acquisitions of more than 15 percent of
our common stock without negotiations with the Board of Directors. The rights
expire May 3, 2009.

Net Income (Loss) Per Share:

A reconciliation of the numerator and the denominator of basic and
diluted net income (loss) per share are as follows:

63

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`Year Ended December 31,
                                                                 ---------------------------------
                                                                   2000        2001        2002
                                                                 ---------  -----------  ---------
Numerator - Basic
  Net income (loss)............................................ $ 105,748  $   (28,996) $ (15,095)
                                                                 =========  ===========  =========
Denominator - Basic
  Weighted average common stock outstanding....................    86,123       91,084     92,667
                                                                 =========  ===========  =========

Basic net income (loss) per share.............................. $    1.23  $     (0.32) $   (0.16)
                                                                 =========  ===========  =========
Numerator - Diluted:
  Net income (loss)............................................ $ 105,748  $   (28,996) $ (15,095)
                                                                 =========  ===========  =========
Denominator - Diluted:
  Weighted average common stock outstanding....................    86,123       91,084     92,667
  Dilutive potential of common stock equivalents:
    Options....................................................     7,701           --         --
                                                                 ---------  -----------  ---------
                                                                   93,824       91,084     92,667
                                                                 =========  ===========  =========

Diluted net income (loss) per share............................ $    1.13  $     (0.32) $   (0.16)
                                                                 =========  ===========  =========`

Stock options to purchase 10,887,000 and 10,654,000 shares of common stock
with weighted average price of $7.13 and $7.46 were outstanding at December 31,
2001 and 2002, respectively, but were not included in the computation of diluted
net loss per share because we had a net loss in 2001 and 2002. Anti-dilutive
stock options to purchase approximately 358,000 shares of common stock with a
weighted average price of $25.59 were excluded from the computation of diluted
net income per share for 2000 because the exercise price of the options exceeded
the average fair market value of the stock for 2000.

Equity Incentive Plan:

Our 1995 Equity Incentive Plan, or the Equity Incentive Plan, as
amended, has 30,250,000 shares of common stock reserved for issuance upon the
exercise of stock options to our employees, directors, consultants and
affiliates.

Under the Equity Incentive Plan, the Board of Directors has the authority to
determine to whom options will be granted, the number of shares under option,
the option term and the exercise price. The options generally are exercisable
beginning one year from date of grant and generally thereafter over periods
ranging from four to five years from the date of grant. The term of any options
issued may not exceed ten years from the date of grant.

Directors' Option Plan:

Our 1995 Non-Employee Directors' Stock Option Plan, or the Directors'
Plan, as amended, provides for the automatic initial grant of options to
purchase 45,000 shares of our common stock to our non-employee directors. The
Directors' Plan also provides for the grant of options to purchase up to an
additional 18,000 shares annually thereafter. Options under the Directors' Plan
become exercisable immediately upon date of grant, and the exercise price of
options granted must equal or exceed the fair market value of our common stock
on the date of grant. The options expire ten years after the date of grant. As
of December 31, 2002, we have reserved 800,000 shares of common stock for
issuance upon the exercise of stock options under the Directors' Plan.

Activity under the Equity Incentive Plan and Directors' Plan are as follows (in
thousands, except per share data):

64

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`Available            Options Outstanding          Weighted
                                  for    --------------------------------------   Average
                                 Grant    Shares    Price Per Share    Amount      Price
                               --------- --------- -----------------  ---------  ---------
Balances, December 31, 1999...    3,752     9,618 $  0.05 - $  8.29  $  13,546  $    1.41
     Granted..................   (3,921)    3,921    9.85 -   29.44     62,559      15.95
     Exercised................       --    (2,449)   0.05 -    5.56     (2,410)      0.98
     Terminated...............      487      (487)   0.68 -   29.44     (2,267)      4.66
     Authorized...............    3,000        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2000...    3,318    10,603    0.05 -   29.44     71,428       6.74
     Granted..................   (1,878)    1,878    4.46 -   18.56     11,639       6.20
     Exercised................       --    (1,220)   0.05 -   10.29     (1,294)      1.06
     Terminated...............      374      (374)   0.68 -   29.44     (4,128)     11.02
     Authorized...............    2,000        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2001...    3,814    10,887    0.05 -   29.44     77,645       7.13
     Granted..................   (1,377)    1,377    3.65 -   10.80      7,133       5.16
     Exercised................       --    (1,193)   0.05 -    8.63     (1,227)      1.03
     Terminated...............      417      (417)   0.68 -   29.44     (4,038)      9.68
     Authorized...............    2,200        --         -                 --         --
                               --------- ---------                    ---------
Balances, December 31, 2002...    5,054    10,654 $  0.05 - $ 29.44  $  79,513  $    7.46
                               ========= =========                    =========`

At December 31, 2000, 2001 and 2002, 3,643,000, 5,398,000 and 6,568,000
options were exercisable at a weighted-average exercise price per share of
$1.63, $5.06 and $6.62, respectively.

Employee Stock Purchase Plan:

Our 1995 Employee Stock Purchase Plan, or the Purchase Plan, as
amended, has 3,600,000 shares reserved for issuance. The Purchase Plan provides
for eligible employees to purchase shares of common stock at a price equal to
85% of the fair market value of our common stock on the date of the option
grant, or, if lower, 85% of the fair market value of our common stock six months
after the option grant, by withholding up to 10 percent of their annual base
earnings. At December 31, 2002, 931,000 shares were available for purchase under
the Purchase Plan. Shares issued under the Purchase Plan in 2000, 2001 and 2002
were 252,000, 247,000 and 517,000, respectively.

Stock Compensation:

No compensation cost has been recognized for the Equity Incentive
Plan, the Directors' Plan or the Purchase Plan. Had compensation cost for these
plans been determined based on the fair value at the grant date for the awards,
our net income (loss) and net income (loss) per share for 2000, 2001 and 2002
would have been decreased (increased) to the pro forma amounts indicated below
(in thousands):

`Year Ended December 31,
                                                   -------------------------------
                                                     2000       2001       2002
                                                   ---------  ---------  ---------
Net income (loss), as reported................... $ 105,748  $ (28,996) $ (15,095)
Deduct: total stock-based employee compensation
   expense determined under fair value based
   method for all awards, net of related
   tax effects...................................   (16,048)   (16,677)   (12,112)
                                                   ---------  ---------  ---------
Pro forma net income (loss)...................... $  89,700  $ (45,673) $ (27,207)
Pro forma net income (loss) per share - basic.... $    1.04  $   (0.50) $   (0.29)
Pro forma net income (loss) per share - diluted.. $    0.97  $   (0.50) $   (0.29)`

The fair value of each option grant for both the Directors' Plan and the
Equity Incentive Plan is estimated on the date of grant using the Black-Scholes
multiple options pricing model with the following weighted average assumptions
by year:

65

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`Year Ended December 31,
                                                   -------------------------------
                                                     2000       2001       2002
                                                   ---------  ---------  ---------
Risk-free interest rate..........................  5.9-6.4%   3.9-5.0%   2.8-4.9%
Expected term of option..........................  2 years    3 years    3 years
Expected volatility..............................  100%       100%       100%
Expected dividend yield..........................  0%         0%         0%`

The weighted average fair value of options granted under the Equity Incentive
Plan and the Directors' Plan during 2000, 2001 and 2002 was $12.70, $4.01 and
$4.01, respectively, per share.

The fair value of each stock purchase right is estimated using the
Black-Scholes model with the following weighted average assumptions by year:

`Year Ended December 31,
                                                   -------------------------------
                                                     2000       2001       2002
                                                   ---------  ---------  ---------
Risk-free interest rate..........................  6.0-6.1%   3.6-5.3%   2.1-2.3%
Expected term of right...........................  1/2 year   1/2 year   1/2 year
Expected volatility..............................  100%       100%       100%
Expected dividend yield..........................  0%         0%         0%`

Option grants and purchase plan rights are priced at the date of grant. The
risk-free interest rate range represents the low and high end of the range used
at different points during the year.

The weighted average valuation of right grants under the Purchase Plan during
2000, 2001 and 2002 was $2.77, $7.00 and $3.81, respectively, per share.

The options outstanding and currently exercisable by exercise price under the
Equity Incentive Plan and the Directors' Plan at December 31, 2002 are as
follows:

`Options Outstanding         Options Exercisable
                    ---------------------------------- ----------------------
                                Weighted-
                                 Average    Weighted-              Weighted-
                                Remaining    Average                Average
    Range of          Number    Contractual  Exercise    Number     Exercise
 Exercise Prices    Outstanding    Life       Price    Outstanding   Price
------------------- ----------- ----------  ---------- ----------  ----------
$   0.05 - $  0.05      79,000       0.52  $     0.05     79,000  $     0.05
$   0.06 - $  1.04   2,199,000       5.08  $     0.92  2,172,000  $     0.92
$   1.08 - $  1.84     441,000       5.55  $     1.36    361,000  $     1.33
$   1.92 - $  3.65   1,869,000       7.70  $     2.91    936,000  $     2.37
$   3.81 - $  5.56   1,867,000       7.67  $     4.64    612,000  $     4.73
$   6.36 - $  9.92   1,259,000       7.99  $     8.89    711,000  $     9.07
$  10.29 - $ 11.85   1,080,000       6.14  $    11.18    734,000  $    11.11
$  17.79 - $ 24.75   1,382,000       7.32  $    19.63    647,000  $    20.13
$  25.27 - $ 28.35     461,000       7.54  $    25.80    306,000  $    25.96
$  29.44 - $ 29.44      17,000       7.50  $    29.44     10,000  $    29.44
                    -----------                        ----------
$   0.05 - $ 29.44  10,654,000       6.83  $     7.46  6,568,000  $     6.62
                    ===========                        ==========`

8. Acquisition:

On December 1, 2000, we increased our ownership of Agate Semiconductor,
Inc., or Agate, a privately held, memory design company located in Santa Clara,
California, from 39.45% to 100% in a series of related transactions, effectively
purchasing all of the remaining capital stock of Agate. The purchase price of
$4.7 million, which was paid in cash and includes acquisition costs of $40,000,
was accounted for using the purchase method of accounting, which means that the
purchase price was allocated to the assets acquired and liabilities assumed
based on the estimated fair values at the date of the acquisition. The purchase
price comprises cash paid of $4.2 million and $498,000 paid in 2001. The results
of operations of Agate have been included with our results of operations since
December 1, 2000, the date that the acquisition was consummated.

66

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The fair value of the assets of Agate, which was determined through
established valuation techniques used by an independent appraiser, and a summary
of the consideration exchanged for these assets is as follows (in thousands):

`Total purchase price......................................... $   4,657
                                                               =========
Assets acquired:
   Tangible assets, primarily cash, deposits, and equipment.. $      33
   Deferred tax asset........................................       863
   Patents...................................................       762
   Workforce  ...............................................       152
   Purchased in-process research and development.............     3,911
Deferred tax liability ......................................      (366)
Other liabilities assumed....................................      (698)
                                                               ---------
                                                              $   4,657
                                                               =========`

The amount allocated to the patents and the workforce is amortized on a
straight line basis over five and three years, respectively. The amount of the
purchase price allocated to purchased in-process research and development, which
had no alternative future use and relates to a product for which technological
feasibility had not been established, was expensed at the acquisition date.

As part of the acquisition, we have agreed to pay $659,000 to certain Agate
employees if they remain in our employ until December 1, 2001. In December 2001,
we paid the entire $659,000 to those employees and expensed it as compensation.
In addition, after the purchase, loans assumed totaling $637,000 were repaid in
cash. Summarized below are the unaudited pro forma results of SST as though
Agate had been acquired at the beginning of 2000. Adjustments have been made for
the estimated increases in amortization related to the purchase of patents,
workforce, and other appropriate pro forma adjustments.

`December 31,
                                                     2000
                                                  -----------
Revenue......................................... $   490,261
Net income...................................... $   108,313
Net income per share - basic.................... $      1.26
Net income per share - diluted.................. $      1.15`

The above amounts are based upon certain assumptions and estimates which we
believe are reasonable and do not reflect any benefit from economies of scales,
which might be achieved from combined operations. The pro forma financial
information presented above is not necessarily indicative of either the results
of operations that would have occurred had the acquisition taken place at the
beginning of the period presented or of future results of operations of the
combined companies. The charge for purchased in process research and development
has not been included in the pro forma results above because it is nonrecurring
and directly related to the acquisition.

9. Other Operating Expenses:

Other operating expenses comprised (in thousands):

`Year ended December 31,
                                              --------------------------------
                                                2000        2001       2002
                                              ---------  ----------  ---------
In-process research and development......... $   3,911  $       --  $      --
Operating lease impairment..................        --         756         --
Patent impairment...........................        --         590         --
                                              ---------  ----------  ---------
                                             $   3,911  $    1,346  $      --
                                              =========  ==========  =========`

In-process research and development. In 2000 we incurred
charges for in-process research and development related to our acquisition of
Agate, see Note 8 of these Notes to the Consolidated Financial Statements.

Operating lease impairment. During the third quarter of 2001,
we recorded a period charge to other operating expense of approximately $756,000
relating to an operating lease for an abandoned building. This charge represents

67

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Patent impairment. During the quarter ended December 31, 2001,
due to the delays in completing the first flash memory device using the Agate technology, we
recorded an expense for impairment of intangible assets of $590,000. The assets
relate to patents acquired as part of the acquisition of Agate Semiconductor
Inc. in December 2000. We reviewed the recoverability of the recorded amounts
based on expected future cash flows (undiscounted and before interest) from use
of these assets and then determined the impairment loss of $590,000 based on the
difference between the net book value of the assets and the estimated fair value
of the assets.

10. Impairment of Equity Investments:

In 2000, we acquired a 10.0% interest in Apacer Technology, Inc., or
Apacer, a privately held company located in Taiwan that designs, manufactures
and markets memory modules, for approximately $9.9 million in cash.  Our
investment in Apacer was valued at cost.  Bing Yeh, our President and CEO and a
member of our Board of Directors, is a member of Apacer's Board of Directors.
In 2001, we invested an additional $2.1 million in Apacer.  In August 2002, we
made an additional investment of $181,000.  At the end of the third quarter of
2002, we determined that a continued and significant decline in Apacer's price
per share was other than temporary, and accordingly, in the third quarter of
2002, we recorded a period charge to other expense of approximately $7.8 million
to write down our investment in Apacer to $4.4 million which was determined
using the price per share paid for the additional investment in August 2002.

During 2001, KYE, a company in which we have an investment, completed an
initial public offering on the Taiwan Stock Exchange.  Since the initial public
offering there has been a significant decline in the market value of the
investment. We had concluded that the decline in value is "other-than-temporary"
and a write down of $3.3 million was necessary as of December 31, 2001. The
investment was written down to $1.3 million based on the quoted market price as
of December 31, 2001. As of December 31, 2002, the recorded value of our KYE
investment was approximately $1.4 million based on the quoted market price as of
the balance sheet date.

11. Income Taxes:

The provision for income taxes reflected in the statements of operations
for the years ended December 31, 2000, 2001 and 2002 are as follows (in
thousands):

`Year Ended December 31,
                                       ---------------------------------
                                         2000        2001        2002
                                       ---------  -----------  ---------
Current:
      Federal, net of benefit of net
        operating losses utilized of
        $4,992 in 2000............... $  47,187  $     2,078  $  (3,912)
      State..........................     3,606            1          1
      Foreign........................        14           12         16
                                       ---------  -----------  ---------
                                         50,807        2,091     (3,895)
                                       ---------  -----------  ---------
Deferred:
      Federal........................    (8,273)     (16,518)    (5,874)
      State..........................      (721)      (3,345)    (1,162)
                                       ---------  -----------  ---------
                                         (8,994)     (19,863)    (7,036)
                                       ---------  -----------  ---------
                                      $  41,813  $   (17,772) $ (10,931)
                                       =========  ===========  =========`

Substantially all of our revenue is taxable in the United States of America.
Our effective tax rate (benefit)/provision differs from the statutory federal
income tax rate as shown in the following schedule:

68

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`Year Ended December 31,
                                       ----------------------------------
                                         2000        2001        2002
                                       ---------- ------------ ----------
United States statutory rate.........      35.0 %      (35.0)%    (35.0)%
State taxes, net of federal benefit..       3.9         (3.0)      (4.5)
Foreign taxes, net...................        --          0.2         --
Research and development credit......      (2.9)        (3.0)      (5.9)
Tax exempt interest..................        --           --       (2.5)
Capital loss carried forward and not
   benefitted........................        --           --       10.4
Change in estimated tax contingency..        --           --       (4.3)
Change in valuation allowance........      (8.6)          --         --
Other................................       0.9          2.8       (0.2)
                                       ---------- ------------ ----------
                                           28.3 %      (38.0)%    (42.0)%
                                       ========== ============ ==========`



As of December 31, 2001 and 2002 our deferred tax assets and liabilities
consisted of (in thousands):

`December 31,
                                                  ----------------------
                                                     2001        2002
                                                  -----------  ---------
Allowance for excess and obsolete inventory..... $    16,482  $   6,096
Allowance for sales returns.....................       1,739        691
Allowance for doubtful accounts.................       1,088      1,709
Deferred revenue................................         133      1,546
Other...........................................       2,428        803
Net operating loss carry-forwards...............         570      1,731
Depreciation....................................       1,385        648
Tax credits.....................................       5,529      9,094
                                                  -----------  ---------
                                                 $    29,354  $  22,318
                                                  ===========  =========

Current portion................................. $    24,115  $  17,154
Long-term portion...............................       5,239      5,164
                                                  -----------  ---------
                                                 $    29,354  $  22,318
                                                  ===========  =========`

In the year ended December 31, 2000, we determined that it is more likely
than not that the deferred tax assets were realizable based on our operating
results in 2000 and projected future earnings.  As of December 31, 2002, we have
total short-term and long-term deferred tax assets of $22.3 million.  If we
continue to incur net losses in the future and the realization of the deferred
tax assets through future taxable income becomes uncertain, we may be required
to provide a valuation allowance for our deferred tax assets.  We have research
credit carry-forwards of approximately $3.0 million for California income tax
purposes.  The California research credit can be carried forward indefinitely.
We have research credit carry-forwards of approximately $1.4 million for federal
income tax purposes.  The federal research credit can be carried forward and
will expire in 2022.

We have foreign tax credit carry-forwards of approximately $4.5 million that,
if not utilized, will expire in 2007.

We have federal operating loss carry-forwards of approximately $5.0 million
that, if not utilized, will expire in 2022.

12. Segment Reporting:

Our operations involve the design, development, manufacturing, marketing
and technical support of our nonvolatile memory products. We offer low and
medium density devices that target a broad range of existing and emerging
applications in the digital consumer, networking, wireless communications and
Internet computing markets. Our products are differentiated based upon
attributes such as density, voltage, access speed, package and predicted
endurance. We also license our technology for use in non-competing applications.

We manage our business in four reportable segments: the Standard Memory

69

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SMPG includes our three standard flash memory product families: the
Small-Sector Flash, or SSF, family, the Multi-Purpose Flash, or MPF, family, and the
Many-Time Programmable, or MTP, family. These families allow us to produce
products optimized for cost, functionality and quality to support a broad range
of mainstream applications that use nonvolatile memory products.

ASPG includes Concurrent SuperFlash, Serial Flash, Firmware Hub, or FWH, and
Low Pin Count, or LPC, flash products. These products are designed to address
specific applications such as cellular phones, pagers, PDAs, set-top boxes, hard
disk drives and PCs. ASPG also includes flash embedded controllers such as the
FlashFlex51 flash microcontroller and the ATA flash disk controller to consumer,
industrial and mass data storage applications.

SPG includes ComboMemory, ROM/RAM Combos and other special flash products.
These products are used in applications requiring low power and a small form
factor such as cellular phones, wireless modems, MP3 players, pagers and digital
organizers.

Technology licensing includes both up front license fees and royalties.

The following table shows our product revenues and gross profit (loss) for
each segment (in thousands):

`Year Ended December 31, 2002
                                          --------------------------
                                                           Gross
                                            Revenues       Profit
                                          ------------  ------------
SMPG.................................... $    168,970  $     12,647
ASPG....................................       68,637        23,554
SPG.....................................        6,414         1,574
Technology Licensing....................       30,637        30,637
                                          ------------  ------------
                                         $    274,658  $     68,412
                                          ============  ============


                                           Year Ended December 31, 2001
                                          --------------------------
                                                           Gross
                                            Revenues    Profit (Loss)
                                          ------------  ------------
SMPG.................................... $    152,246  $    (32,964)
ASPG....................................       98,138        43,816
SPG.....................................        8,234          (395)
Technology Licensing....................       35,412        35,412
                                          ------------  ------------
                                         $    294,030  $     45,869
                                          ============  ============


                                           Year Ended December 31, 2000
                                          --------------------------
                                                           Gross
                                            Revenues       Profit
                                          ------------  ------------
SMPG.................................... $    401,162  $    170,522
ASPG....................................       56,384        33,049
SPG.....................................       17,770         7,606
Technology Licensing....................       14,945        14,945
                                          ------------  ------------
                                         $    490,261  $    226,122
                                          ============  ============`

Our net revenues are all denominated in U.S. dollars and are summarized as
follows (in thousands):

70

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`Year ended December 31,
                                              --------------------------------
                                                2000        2001       2002
                                              ---------  ----------  ---------
United States............................... $  76,898  $   28,592  $  21,871
Europe......................................    28,376      21,332     10,599
Japan.......................................    66,635      23,549     28,465
Korea.......................................    42,986      22,039     30,321
Taiwan......................................   133,677     110,847     91,219
China (including Hong Kong).................    90,839      57,146     70,609
Other Asian countries.......................    48,102      28,157     21,574
Rest of world...............................     2,748       2,368         --
                                              ---------  ----------  ---------
                                             $ 490,261  $  294,030  $ 274,658
                                              =========  ==========  =========`

Foreign revenue is based on the country to which the product
is shipped.

The locations and net book value of long-lived assets
follows:

`December 31,
                                              ---------------------
                                                2001        2002
                                              ---------  ----------
Japan....................................... $      64  $    3,605
United States...............................    22,137      16,120
Other.......................................       902       1,257
                                              ---------  ----------
                                             $  23,103  $   20,982
                                              =========  ==========`

13. Equity Investments and Related Party Reporting:

Equity investments comprise (in thousands):

`December 31,
                                              ---------------------
                                                2001        2002
                                              ---------  ----------
Silicon Technology Co., Ltd................. $     939  $      939
Apacer Technology, Inc......................    11,931       4,358
Powertech Technology, Incorporated..........     2,532       2,532
Professional Computer Technology Limited....     1,605       1,784
Grace Semiconductor Manufacturing
   Corporation..............................    50,000      50,000
Insyde Software Corporation.................        --         964
Other.......................................        --         333
                                              ---------  ----------
                                             $  67,007  $   60,910
                                              =========  ==========`

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The following table is a summary of our related party revenues and purchases
(in thousands):

`Year Ended
                                                December 31, 2002
                                              ---------------------
                                              Revenues    Purchases
                                              ---------  ----------
Silicon Technology Co., Ltd................. $   2,089  $       --
Ambit Microsystems Corp.....................       269          --
Apacer Technology, Inc......................       899         588
Professional Computer Technology Limited....       141          --
Silicon Professional Technology Ltd.........   140,003          --
King Yuan Electronics Company, Limited......        --      18,163
Powertech Technology, Incorporated..........        --       8,378
                                              ---------  ----------
                                             $ 143,401  $   27,130
                                              =========  ==========

                                                   Year Ended
                                                December 31, 2001
                                              ---------------------
                                              Revenues    Purchases
                                              ---------  ----------
Silicon Technology Co., Ltd................. $   3,728  $       --
Acer and related entities (1)...............     5,129         290
Apacer Technology, Inc......................       280         626
Professional Computer Technology Limited....     4,019          --
Silicon Professional Technology Ltd.........    76,869          --
King Yuan Electronics Company, Limited......        --      21,827
Powertech Technology, Incorporated..........        --       9,031
                                              ---------  ----------
                                             $  90,025  $   31,774
                                              =========  ==========

                                                   Year Ended
                                                December 31, 2000
                                              ---------------------
                                              Revenues    Purchases
                                              ---------  ----------
Silicon Technology Co., Ltd................. $  12,047  $       --
Acer and related entities (1)...............    21,280           6
Apacer Technology, Inc......................       447           8
Ocean Contract Manufacturing Ltd............     1,441          --
Professional Computer Technology Limited....    22,348          --
King Yuan Electronics Company, Limited......        --      16,721
Powertech Technology, Incorporated..........     9,044       9,478
                                              ---------  ----------
                                             $  66,608  $   26,213
                                              =========  ==========`

(1) Excludes Apacer Technology, Inc. balances.

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The following table is a summary of our related party accounts receivable and
accounts payable and accruals (in thousands):

`December 31, 2001      December 31, 2002
                                              ---------------------  ---------------------
                                                          Accounts               Accounts
                                              Accounts   Payable and Accounts   Payable and
                                              Receivable  Accruals   Receivable  Accruals
                                              ---------  ----------  ---------  ----------
Silicon Technology Co., Ltd................. $     192  $       --  $     459  $       --
Acer and related entities (1)...............       524          87         --          --
Ambit Microsystems Corp.....................       113          --         --          --
Apacer Technology, Inc......................       128          27        141         119
Professional Computer Technology Limited....        --         896         --          73
Silicon Professional Technology Ltd.........    19,839         863     24,648         432
King Yuan Electronics Company, Limited......        --       3,621         --       4,285
Powertech Technology, Incorporated..........        --       2,523         --       2,253
                                              ---------  ----------  ---------  ----------
                                             $  20,796  $    8,017  $  25,248  $    7,162
                                              =========  ==========  =========  ==========`

(1) Excludes Ambit Microsystems Corp. and Apacer Technology, Inc.
balances.

In 1996, we acquired a 14% interest in Silicon Technology Co., Ltd., or
Silicon Technology, a privately held Japanese company, for approximately
$939,000 in cash. Bing Yeh our president, CEO and Board Director also is a
member of Silicon Technology's board. At December 31, 2002, our investment,
which is carried at cost, represented approximately 9% of the outstanding equity
of Silicon Technology.

Dr. Ronald Chwang, a member of our Board of Directors, is also a director of
Ambit Microsystems Corp., which is a related entity of Acer Incorporated, or
Acer.

In 2000, we acquired a 10% interest in Apacer for approximately $9,868,000 in
cash.  Apacer, a privately held Taiwanese company and a related entity of Acer,
is a memory module manufacturer.  Bing Yeh our president, CEO and Board Director
also is a member of Apacer's board.  In 2001, we invested an additional $2.1
million in Apacer.  In August 2002, we made an additional investment of
$181,000.  The investment was written down to $4.4 million during 2002, refer to
Note 10 of these Notes to the Consolidated Financial Statements.  At December
31, 2002, our investment represented approximately 10% of the outstanding equity
of Apacer.

In 2000, we acquired a 15% interest in PCT, a privately held Taiwanese
company, for approximately $1,456,000 in cash.  Bing Yeh our president, CEO and
Board Director also is a member of PCT's board.  PCT is one of our stocking
representatives.  The investment is carried at cost.  In May 2002, we made an
additional investment of $179,000 in PCT.

PCT earns commissions for point-of-sales transactions to its customers.
PCT's commissions are paid at the same rate as all of our other stocking
representatives in Asia.  In 2000, 2001 and 2002 we paid sales commissions of
approximately $1,970,000, $1,701,000 and $2,306,000, respectively, to PCT.  In
March 2001, PCT established a separate company and wholly-owned subsidiary, SPT,
to provide planning, warehousing, delivery, billing, collection and other
logistic functions for us in Taiwan. SPT now services substantially all of our
end customers based in Taiwan, China and other Southeast Asia countries.
Product shipped to SPT is accounted for as consigned inventory and revenue is
recognized when the products have been delivered and are considered as a sale to
our end customers by SPT. We pay SPT a fee based on a percentage of revenue for
each product sold through SPT to our end customers.  The fee paid to SPT covers
the cost of warehousing and insuring inventory and accounts receivable,
personnel costs required to maintain logistics and information technology
functions and the costs to perform billing and collection of accounts
receivable.  SPT receives extended payment terms and must pay us whether or not
they have collected the accounts receivable.

In 2000, we acquired a 1% interest in KYE, a publicly held Taiwanese company,
which is a production subcontractor, for approximately $4,574,000 in cash.
During 2001, KYE completed an initial public offering on the Taiwan Stock
Exchange.  Accordingly, the investment has been included in long-term
available-for-sale investments in the balance sheet as of December 31, 2001 and 2002. The
investment was written down to $1.3 million during 2001, refer to Note 10 of

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In 2000, we acquired a 3% interest in Powertech Technology, Inc., or PTI, a
privately held Taiwanese company, which is a production subcontractor, for
approximately $2,532,000 in cash. The investment is carried at cost.

In 2001, we acquired a 9% interest in Grace Semiconductor Manufacturing
Corporation, or GSMC, a privately held Cayman Islands company with operations in
China, which is a wafer foundry under construction, for approximately
$50,000,000 in cash. Bing Yeh our president, CEO and Board Director also is a
member of GSMC's board. This investment is carried at cost. We anticipate that
GSMC will begin to manufacture some of our products during 2003.

Mr. Yasushi Chikagami, a member of our board of directors, is also a member
of the board of directors of Ocean Automation Ltd. Ocean Automation Ltd. and
certain of its affiliates, such as Ocean Contract Manufacturing Ltd, are our
customers.

In 2002, we acquired a 6% interest in Insyde Software Corporation, or Insyde,
a privately held Taiwanese company, for approximately $964,000 in cash.  Bing
Yeh our president, CEO and Board Director is also a member of Insyde's board of
directors. As of December 31, 2002, the investment was carried at cost.  In
January 2003, Insyde completed an initial public offering on the Taiwan Stock
Exchange.  Accordingly, in 2003, we will record our Insyde investment based on
the quoted market price as of our reporting date.

14. Employee Benefit Plans:

Profit Sharing Plan:

We have a Profit Sharing Plan under which employees may collectively
earn up to 10% of our operating profit, provided that both net earnings before
interest income (expense), net provision for (benefit from) income taxes and
operating profit are greater than 10% of sales. For purposes of the Profit
Sharing Plan, "operating profit" is net revenues less cost of revenues and less
operating expenses. The sum paid to any particular employee as profit sharing is
a function of the employee's length of service, performance and salary. We plan
to pay profit sharing sums, when available, to employees twice a year. No profit
sharing was paid in relation to 2001 or 2002. During 2000 profit sharing
expenses of $14,876,000 were recorded.

401(k) Plan:

We have adopted the SST 401(k) Tax Sheltered Savings Plan and Trust
(the Plan), as amended, which is intended to qualify under Section 401 of the
Internal Revenue Code of 1986. The Plan covers essentially all employees. Each
eligible employee may elect to contribute to the Plan, through payroll
deductions, up to 15% of their compensation, subject to certain limitations. At
our discretion, we may make additional contributions on behalf of employees. All
employee contributions are 100% vested. During 2000, 2001 and 2002, we matched
the first $1,000 of each employees' contribution, for a total of $326,000,
$436,000 and $405,000, respectively.



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SCHEDULE II

SILICON STORAGE TECHNOLOGY, INC.

                        VALUATION AND QUALIFYING ACCOUNTS

                                 (in thousands)

`Balance at  Charged to    Write-off   Balance at
                                                   Beginning    Costs and   of Accounts    End of
Description                                        of Period    Expenses      /Other       Period
-------------------------------------------------  ----------  -----------  -----------  ----------
Year ended December 31, 2000
  Allowance for doubtful accounts................ $      535  $       477  $       229  $      783
  Allowance for sales returns.................... $       41  $     8,166  $        --  $    8,207
  Allowance for excess and obsolete inventories.. $      150  $     4,261  $     1,895  $    2,516
  Valuation allowance on deferred tax............ $   12,699  $   (12,699) $        --  $       --


Year ended December 31, 2001
  Allowance for doubtful accounts................ $      783  $     2,251  $       220  $    2,814
  Allowance for sales returns.................... $    8,207  $    32,227  $    35,936  $    4,498
  Allowance for excess and obsolete inventories.. $    2,516  $    73,932  $    28,701  $   47,747
  Valuation allowance on deferred tax............ $       --  $        --  $        --  $       --


Year ended December 31, 2002
  Allowance for doubtful accounts................ $    2,814  $     3,046  $     1,440  $    4,420
  Allowance for sales returns.................... $    4,498  $     2,842  $     5,553  $    1,787
  Allowance for excess and obsolete inventories.. $   47,747  $     9,160  $    29,466  $   27,441
  Valuation allowance on deferred tax............ $       --  $        --  $        --  $       --`

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